Our big concern here is not just an earnings issue as earnings were above estimates on the bottom line. It is also a future sales risk issue. Revenue was up almost 17% to $378 million and its fourth quarter profit of $98 million was up about 18%. While this was just under expectations on sales, the real issue is that sales in the quarter ahead were put in a range of $352 to $362 million versus an estimate of $369.8 million. That shows negative sequential sales and a wider miss projected versus the $3 million or so shortfall seen in the fourth quarter against consensus sales estimates from Wall Street analysts.
What we are seeing is starting to feel like a demand shift under a new CEO. The press release looked pretty good and the comments were mostly “feel good” comments. When you get to guidance and outside comments the game changes quite a bit. Janney cut the rating to Neutral and Jefferies cut the rating to Hold, both of which previously had “buy” theme ratings before the news.
On the flip side, Canaccord Genuity maintained a “buy” rating with a $45 price target. It even calls the pullback an attractive entry point where the bar is being set very low for future upside surprises.
In 2012 Akamai spent $141 million buying back stock and it has extended that buyback plan to up to a total of $150 million more for buybacks. Akamai had over $1 billion of cash, cash equivalents and marketable securities as of year-end. This will help control dilution of course, but the recent growth patterns and history of Akamai is one where investors might not really want to see it just buy down its share count.
Our fear for this company is that competitive pressure in the cloud may be drastically changing the “good enough” and “fast enough” internet. When we were all using desktops and laptops with lightning-fast web connections we all demanded more and more speed and faster and faster content delivery. If you are using a 3G or 4G network on a smartphone or on a tablet, let’s just go ahead and admit that speed is not complained about as much. This is a huge opportunity for Akamai but it may pose the risks of a race to zero as well.
Akamai shares are down over 15.5% at $35.10 after closing at $41.58 the prior day on what is closing in on ten-times normal volume of 22 million shares today. The 52-week trading range is $25.90 to $42.53, and the market cap is still $6.23 billion. If the consensus revenue estimates have any value today, Akamai’s Thomson Reuters estimates are almost $1.6 billion in sales in 2013 and $1.8 billion in 2014.
When you see double-digit drops in former high-flying stocks, the initial thought is that things will get worse. As shares were up against resistance on the chart, this drop is one which has to be watched. If you just look at the longer-term two-year stock chart from stockcharts.com below, the $34 to $35 level needs to hold. Otherwise another 5% to 10% of dead air might be there before the next solid support can be found.
The good news is that if shares get back closer to $30 they will start to look cheap against the broader market on sales and earnings barometers. We won’t try to push Akamai as a value stock in the near-term, but we would note that Akamai is already committing its own capital now to buy back its own stock.
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