Buy Akamai To Ride Wave of Video Traffic
Buy Akamai Technologies (NSDQ:AKAM)
Target: $65
Buy Up to: $56
Options Trade: Buy to open the July 28, 2017 call on Akamai Technology (AKAM) with a strike price of $52.5 at $1.95 or lower. Symbol (AKAM170728C52.5).
Please note these options are very thinly traded so you may have to be patient to get filled. I don’t think it’s necessary to bump your price up if you’re not filled immediately.
Akamai will report earnings on July 25. See below for conference call details.
I’ve been following Akamai Technology for the better part of my 25-year career. The company was one of the first to introduce what was then revolutionary edge server technology that improves the speed and reliability of content, specifically video content, across the internet.
Each major drop in its stock has been a buying opportunity.
The stock is down 23% since the beginning of the year due to some of its media customers attempting to distribute their data without the help of Akamai. In the most recent quarter, in particular, Akamai was hurt due to a slowdown in gaming revenue due to less intensive updates to gaming software.
CEO Tom Leighton, who recently purchased $1 million worth of stock, is unfazed by this temporary slowdown. Part of his confidence is likely due to the strength in Akamai’s Performance and Security business, which grew 17% last quarter and now makes up 60% of revenues.
Higher profits in this segment are pulling up overall corporate profit margins. The tsunami of video being streamed over tablets, laptops and cell phones is not slowing down, and Akamai’s technology is the balm to soothe the bumpy delivery of those files.
My $65 target is based on a 20 P/E on 2019 estimates of $3.25. Akamai is incredibly profitable and has over $5.00 net cash (cash less debt) on its balance sheet. I’ve stress-tested the estimates for 2017-2019 and believe they look conservative.
Event: Akamai Second Quarter Conference Call
Date: Tuesday, July 25 4:30 PM (EST)
Dial In: Only webcast available via Akamai’s Investor Relations page
What to Listen For:
1. How quickly is the Performance and Security revenue growing? Last quarter Security alone grew 37%. Growth above 35% is a bullish number. The Security number will only be given on the call. The press release will lump Performance and Security together, which should grow mid-teens.
2. Has traffic from gaming come back to life? In the March quarter, a declaration in gaming traffic weighed on Media revenue. Revenue for this product set ex-top 6 customers should grow at least 2%. Including these customers, revenue should not drop more than 4%.
Stock Talk
Phil Ash
Filled at $1.90 at Fidelity at 11:53 ET.
Rick
I bought another few weeks and went with the Aug $52.50 calls for $2.12.
Phil, I got your email and will get back to you later this week.
WillW
I’m with you, Rick, in terms of avoiding some of the rapid decay of the time value. To Linda’s comment about cashing in the call option on a quick jump while holding the stock for further appreciation, have you seen any discussion about capturing option profits, then establishing a new position at a higher strike for the later appreciation? I’ve only seen models of selling pieces of an original position as profit targets get hit. Since this is all short-term trading, I’d be tempted to book the profit on the surge from the original position, then evaluate establishing a position at the new price level with a similar number of dollars as used for the first position.
Rick
I hear you. I am not familiar with any published models. I made my first trade with Investing Daily last fall. There was a quick run up and I saw that several people cashed out. I stayed in and eventually the big run-up fizzled and came back to a small gain. Ever since then, I have been quicker to take profits and have then reinvested when the stock came back down.
CC (Chemours) is a stock that has yo-yoed and several times has reaped big rewards on option trades. Since Linda’s recommendations are not specifically time constrained her portfolio has been a fertile ground for short term option trades based on swings in value for stocks that Linda has still rated as buys.
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Richard Bryan
Linda,
I just bought 5 contracts of AKAM @ $1.84=$920. Do I just wait till 7-28? or do I make some move before then?
As you surely can tell, I have not done this before, so a little more info from you would be appreciated.
Linda McDonough
Richard,
I expect AKAM to move up before the July 25 event (when second quarter earnings are released) but often times a stock may not cooperate until the expected news hits.
Often when I recommend options if they move up quickly I will book the gain and continue to hold the stock for the event. I will keep subscribers up to date on any other news that comes up between now and then. You will definitely see a trade alert if I recommend selling these calls.
Welcome aboard.
Best,
Linda
Fo
So, Linda, is it right to say that subscribers wishing to follow the recommendation could buy either shares or options but the the most complete (perhaps even preferred) approach would be to take exposure to both shares and options?
Linda McDonough
Fo,
That is a good summation. However, I do appreciate that some subscribers may not have the risk tolerance for the options purchases. There is always the risk that options expire worthless. I do my very best to avoid that situation but it is always a risk.
Best,
Linda
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Pi Chi
Filled for $1.73 @ Schwab
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SSA
Filled at $1.75 at Fidelity at 1:58 ET.
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Fo
Linda, great information on what to look for in the conference call. (It does feel like you are sizing up an old friend.)
Do you think subscribers holding shares might want to use the information in the after-hours session?
I am currently deciding between options and shares. I have a bias for options but if part of the play is quick reaction to earnings, I might go with shares.
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Fo
Linda, great information on what to look for in the conference call. (It does feel like you are sizing up an old friend.)
Do you think subscribers holding shares might want to use the information in the after-hours session?
I am currently deciding between options and shares. I have a bias for options but if part of the play is quick reactioyn to earnings, I might go with shares.
Linda McDonough
Fo-
I don’t normally trade after hours. The volume is thin and you can often get whipped around by the price volatility. The event that I expect to ignite the shares is the earnings call. The company does not have any other investor events or presentations before then.
The options are obviously a riskier play for a much bigger potential percentage reward but do have a limited life. I expect the stock will continue to rise after the earnings.
Best,
Linda
Fo
Thanks, Linda!
Enjoying PCA.
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Linda McDonough
Hello all,
Akamai reported its second quarter last night. The report was good (beat eps and revenue slightly), but the company lowered the outlook for the third quarter. While the guide down is not huge, investors are getting impatient waiting for Akamai’s media business to turn around. I think the sell-off is way overdone. Akamai generated $225M in cash this quarter and has mid-30 percent margins. The 6 large media customers who have been servicing traffic in-house now represent less than 10% of revenue. I think the stock is a great buy here on the drop.
Best,
Linda
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