Why Akamai Technologies Shares Dropped

Why Akamai Technologies Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Akamai plunged more than 11% Thursday after the company provided weak forward revenue guidance following its solid third-quarter earnings results.

So what: Third-quarter revenue rose 15% year over year, to $396 million, which translated to adjusted net income growth of 32%, to $0.50 per diluted share. Both numbers beat analysts' expectations, which called for adjusted earnings of $0.46 per share on $387.7 million in sales.

However, during Akamai's subsequent earnings conference call, management stated that they expect fourth-quarter revenue to be in the range of $412 million to $430 million, the midpoint of which sits slightly below average estimates for Q4 revenue of $423.84 million.

That wouldn't have been particularly worrisome, but management also elaborated that, factored into that range was the potential impact from a price renegotiation with their largest media customer, which many analysts largely presume to be none other than Apple.

Now what: To management's credit, they did point out the fact that no single customer represents more than 10% of Akamai's revenue, so investors shouldn't assume a single rate renegotation will crush the business. What's more, this particular customer apparently hasn't revised its contract in a few years, so it's currently paying via a relatively dated pricing model.

Even so, Akamai CFO James Benson stated, "We believe the step-down in revenue will have a notable impact in the quarter the renegotiation takes place, and will impact overall company growth rates over the next few quarters."

As a result, and with shares looking pricey even after the pullback at nearly 34 times last year's earnings, and 21 times next year's estimates, today's plunge looks merited as investors reassess Akamai's long-term growth prospects.

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