Akamai Remains Volatile, So Buy On Dips

| About: Akamai Technologies, (AKAM)

When I last wrote about Akamai (NASDAQ:AKAM) in March [See Akamai's 2013 Outlook is Bright], I said I liked AKAM at $34.71. At the time I was long AKAM, but I sold out at $48.05 on May 16, 2013. I prefer to buy and hold, but I have been in and out of AKAM over the last decade because it is so volatile. This is no reflection on the company itself; it is a reflection on the poor judgment of market participants, both on the upside and the downside.

Time for an update. Akamai reported strong revenue in the second quarter (Q2): revenue was $378.1 million, up 3% sequentially from $368.0 million and up 14% from $331.3 million in the year-earlier quarter. GAAP net income was $61.9 million, down 13% sequentially from $71.5 million, but up 40% from $44.2 million year-earlier. GAAP EPS (earnings per share) was $0.34, down 13% sequentially from $0.39, but up 42% from $0.24 year-earlier.

On a non-GAAP basis Q2 net income was $84 million, resulting in EPS of $0.46. Those results reflected a 10% decrease sequentially from Q1 but a 25% increase from Q2 2012. Cash from operations was a significantly stronger $130 million.

Both GAAP and non-GAAP net income and EPS included a $9 million (or $0.05 per share) benefit from a change in depreciation methodology.

Operating expenses were up significantly year over year, cutting into earnings. This mainly reflects R&D and sales and marketing expenses for the newer service offerings for cloud computing and Internet security.

Akamai has two major segments. Content acceleration, its traditional business, had revenue of $179 million, up 14% y/y. This segment is always in a struggle between ever decreasing prices per unit delivered and increasing units delivered, but tends to trend higher consistently y/y.

The performance and security segment saw revenues of $157 million, increasing 7% sequentially and 19% y/y. Service and support segment revenue was $31 million, up 14% sequentially and 41% y/y.

As I said in my last article, "The amount of data being served will continue to increase, and Akamai essentially runs a private toll road system within the Internet for those who want the fast service that is essential to capturing customers and converting views to sales." Akamai also has a unique ability to offer security and other cloud services that will cause revenue and profits to ramp for the foreseeable future. Resale of services through AT&T have begun, and that could drive significant revenue by the end of 2013.

So the only real question for investors is price. I mainly write for long-term investors like myself, with a typical time horizon minimum of 2 years.

On August 5, 2013 Akamai closed at $46.90. That is not much off a 52-week high of $48.47 back on May 16, but up 43% from the 52-week low of 32.64 on April 22, 2013. That shows you how volatile the stock is, but it is also notable that on June 21, 2013 you could buy AKAM for $40.46.

There is no reason to expect less volatility. If the past is prelude, it pays to buy AKAM on the dips. Then you are relatively safe short-run but can be more certain to reap gains in the long run.

At $46.45 Akamai's trailing P/E is 33.7, but it is notable that by GAAP or non-GAAP figures you can get very different P/Es.

I believe that there is little long-term danger in buying at this price, and considerable long-term upside. You have to be able to stand the volatility or be willing to take your chances trading against it.

I want to emphasize that the stock price volatility is not because Akamai's underlying model is particularly volatile. As far as I can tell, it is a historic legacy going all the way back to the 1999 Internet bubble. A lot of trading in and out of AKAM takes place. Nevertheless, the general trend since mid-2011 has been up, and that reflects the commercial success and increases in revenue and profits of this well-managed and well-situated company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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