Akamai (
AKAM
) announced its Q2 earnings and revised its revenue outlook lower
for 2011. Akamai now expects revenue growth for 2011 to be between
10-13% compared to the previous expectation of 15% growth. This and
a weaker outlook overall has caused the stock to collapse this
morning which is now trading around 20% below yesterday's close. In
our pre-earnings article titled
Akamai Earnings Preview: Pricing & CDN
Competition in Focus
, we had mentioned that we would be closely watching
the pricing pressures that Akamai faces from
competitors like Limelight Networks (
LLNW
), InterNAP Network Services (
INAP
) and Level 3 (
LVLT
) for its content delivery network (CDN) service. This competition
is precisely what is weighing on the stock.
Based on the changing dynamics, we have updated our price
estimate for
Akamai stock from $35 to $31
. This implies our price estimate is around 30% ahead of the
current market price.
Pricing pressures continue for Akamai
During the earnings conference call, management mentioned that
revenue growth slowdown is happening primarily due to pricing
pressures.
According to management:
We've seen our top line growth slow down, driven primarily by
the pricing and traffic dynamics in our media and software
delivery businesses, and we've encountered a general slowdown in
a few of the more mature markets outside of the U.S. where we
operate due primarily to the tougher macro economic headwinds in
those markets.
We referred to these in
our preview
note highlighting the below:
Pricing Pressures Persist
We expect that revenue per customer for content delivery
network (CDN) service provided by Akamai will continue
to increase as Internet and broadband penetration increases and
as the rapid growth in e-commerce continues. However, Akamai
has started to face pricing pressure from its competitors, and as
a result, has renewed some of its content delivery contracts at
lower price points.
On the positive side, the revenue contribution from
value-added services such as advertising solutions, dynamic site
solutions and application performance improvement has helped
mitigate the effects of lower content delivery network (CDN)
pricing. Akamai has also started to face new challenges in
value-added services from smaller players (see Akamai Facing New
Challenges in Value-Added Services). Hence it will be interesting
to see if we observe any hint of change in the pricing trend for
Akamai this quarter.
For now the market seems to have lost confidence in Akamai's
ability to defend its prices and market share, which is leading the
slide in its shares.
See our complete analysis for Akamai stock
here