Global internet traffic is expected to jump by more than four times by 2014. The primary driver is video, which in 2010 leaped past peer-to-peer traffic for the first time ever.

So why is Akamai Technologies Inc. (NASDAQ: AKAM) stock getting pounded today after reporting fourth-quarter EPS of $0.40 on revenue of $285 million, both above estimates of EPS of $0.38 and revenue of $283 million? The answer has to be “expectations.”

Akamai’s trailing twelve month P/E ratio is above 48. Forward P/E for the 2011 fiscal year is half that. Any company with valuations like that had better crush expectations. Think Apple Inc. (NASDAQ: AAPL)

If video demand is growing so fast, and if volume is doubling on downloads to mobile devices, as Akamai noted in its conference call, then investors’ expectations must already be bundled into the company’s share price in order to explain the fall of the stock’s price today.

Thus, a lot of profit-taking, probably driven by questions about how much Akamai will profit from the increased demand for video over the internet. The issue is whether or not Akamai and competitors like Limelight Networks, Inc. (NASDAQ: LLNW) and F5 Networks, Inc. (NASDAQ: FFIV) in what appears to be the new era of tiered pricing.

With internet backbone providers seeking to charge more to heavy bandwidth users like Netflix, Inc. (NASDAQ: NFLX), Akamai could see its margins drop unless it boosts its pricing as well. Then, of course, some customers could walk.

And then there’s the challenge of ambient video, aka “puppy cam” traffic. These are internet video sources that feature a camera focused on pets or children or security. A Cisco Systems executive noted that a single puppy cam site generated more viewing hours online than all of the video available at ESPN.[http://www.networkworld.com/news/2011/012411-puppy-cams-threaten-internet.html] Of the top 20 online video sites in Europe, three are puppy cams that did not exist a year ago.

There’s little doubt that internet video traffic will increase. How Akamai and other players will be able to monetize that increase is the big unknown. Akamai, with its cloud and security services, is well-positioned to take a bit of a hit in its video delivery service, but investors’ expectations have outrun reality for the present.

Akamai shares are off more than -16%, to $40.16, relative to a 52-week range of $24.64-$54.65. Volume is nearly six times normal as of noon.

Paul Ausick

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