Time for some profit taking in Akamai
04/26/2013 2:00 pm EST
On the report shares of Akamai climbed $6.39, or 17.7%, to $42.48.
You wouldn’t think that this company’s results share anything at all with Apple’s earnings disappointment of April 23. But they do. The big issue for both companies is the direction of margins in the future.
Much of Wall Street’s sell off of Apple shares is based on fears that the company’s margins will fall with lower margin products such as the iPad mini and lower-priced iPhones.
The bears on Akamai point to the same worries. Margins for accelerating media and entertainment content on the Internet aren’t as juicy as the margins for accelerating enterprise (read corporate) traffic. Part of that’s because of the higher costs of building out media and entertainment systems and part of it is because of increased competition in the media and entertainment sector. In other words, while the growth is in the media and entertainment sector—and while Akamai saw media and entertainment revenue climb to 43.5% of total revenue in the quarter--the increase might not be an unmitigated good thing if it leads to a decline in margins.
There was nothing in the quarter to indicate that margins are in any immediate danger at Akamai. Gross margins, in fact, increased to 76.4%, above the consensus projection of 75%.
But after today’s pop Akamai is within 6% of my February 2014 target price. With the market unsettled and with what has been a weak summer quarter in the last two years approaching, I’m going to take my 12% gain since I added the stock to my Jubak’s Picks portfolio http://jubakpicks.com/ on February 14, 2013 and move to the sidelines for a few months on this stock until I have a better sense of the market direction in the near term. I’m selling Akamai out of the Jubak’s Picks portfolio with an 11.9% gain since I added it on February 14, 2013.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in Akamai as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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