Akamai’s Stock Crashes on Weak Outlook, Sell Off Overdone

Akamai (NASDAQ:AKAM) announced its Q2 earnings and revised its revenue outlook lower for 2011. ^[1] Akamai now expects revenue growth for 2011 to be between 10-13% compared to the previous expectation of 15% growth. This and a weaker outlook overall has caused the stock to collapse this morning which is now trading around 20% below yesterday’s close. In our pre-earnings article titled Akamai Earnings Preview: Pricing & CDN Competition in Focus, we had mentioned that we would be closely watching the pricing pressures that Akamai faces from competitors like Limelight Networks (NASDAQ:LLNW), InterNAP Network Services (NASDAQ:INAP) and Level 3 (NASDAQ:LVLT) for its content delivery network (CDN) service. This competition is precisely what is weighing on the stock.

Based on the changing dynamics, we have updated our price estimate for Akamai stock from $35 to $31. This implies our price estimate is around 30% ahead of the current market price.

Pricing pressures continue for Akamai

During the earnings conference call, management mentioned that revenue growth slowdown is happening primarily due to pricing pressures.

According to management:

We’ve seen our top line growth slow down, driven primarily by the pricing and traffic dynamics in our media and software delivery businesses, and we’ve encountered a general slowdown in a few of the more mature markets outside of the U.S. where we operate due primarily to the tougher macro economic headwinds in those markets. ^[1]

We referred to these in our preview note highlighting the below:

Pricing Pressures Persist

We expect that revenue per customer for content delivery network (CDN) service provided by Akamai will continue to increase as Internet and broadband penetration increases and as the rapid growth in e-commerce continues. However, Akamai has started to face pricing pressure from its competitors, and as a result, has renewed some of its content delivery contracts at lower price points.

On the positive side, the revenue contribution from value-added services such as advertising solutions, dynamic site solutions and application performance improvement has helped mitigate the effects of lower content delivery network (CDN) pricing. Akamai has also started to face new challenges in value-added services from smaller players (see Akamai Facing New Challenges in Value-Added Services). Hence it will be interesting to see if we observe any hint of change in the pricing trend for Akamai this quarter.

For now the market seems to have lost confidence in Akamai’s ability to defend its prices and market share, which is leading the slide in its shares.

See our complete analysis for Akamai stock here

1. Akamai Q2 2011 earnings conference call transcript, SeekingAlpha, July 27th, 2011 [↩] [↩]