Elite Inside Trader

Shares of Akamai (AKAM) are not off to a good start this year.  After breaching $50 per share a few times in 2010, shares of Akamai are now trading around $36.  The decline has occurred despite the fact that its core business is seeing surging demand.  Akamai distributes content for media companies like Apple (AAPL), CBS (CBS), and ESPN.  Referred to as content network distribution (CND), consumers are using and streaming data at exponentially increasing rates.  That should be good news for Akamai.  Media companies need services like Akamai to distribute steaming videos without crashing servers and without disruption of quality.  When video’s pause frequently, consumers tend to give up quickly and go to other sites.  Examples would be, streaming movies from Amazon.com (AMZN), Netflix (NFLX), shows from Hulu, video news from CNN, or video highlights from the big game.

Growth in the industry has stirred competition concerns for Akamai, and has lead to deflating excitement in its shares.  Its customers are now diversifying its content amongst many providers instead of just using Akamai.  Competitors, such as Limelight (LLNW) and Level 3 Communications (LVLT), are enjoying the diversification from major companies for its content network distribution (CDN) business; however, even these companies have reasons to be nervous.

The small and nimble CDN companies, such as the ones mentioned above, have drawn the cross hairs of some of the large companies.  Hewlett-Packard (HPQ) just announced it was moving into cloud computing, which isn’t a direct attack on CDN, but if you’re building up your server network for storing and accessing content, you might as well take a look at selling and distributing for companies as well.  The logic runs along the same lines as opening a pizza shop and deciding to have chicken wings on the menu too.  Up-selling is great for increasing profits, especially for large cap tech companies whose shareholders are getting tired of waiting for their shares to move higher.  Companies that could be standing on the sidelines waiting to enter the CDN market are numerous, and range from Microsoft (MSFT) to Salesforce (CRM) to almost player in the tech industry.

The larger corporations will have huge advantages as well.  They could “bundle” overall product packages and they have much deeper pockets to put towards updating their technology as well as marketing it to their customers.  All bad news for Akamai’s profit margins as more players enter the market giving consumers the opportunity to further diversify CDN’s, ultimately leading to price competition.

Akamai is still well positioned in the market, but investors’ confidence in its long term market leader status is under pressure.  The market itself remains promising; however we’re not looking to rush into a position in the stock at this point in time.

Disclosure: Author, Kevin D. Monaghan Senior Partner at Elite Investment Group, has no position in the mentioned companies.

IMPORTANT NOTICE: "Any information we give you is not our recommendation or advice to take (or not to take) any particular course of action in relation to your investments. You should take your own independent advice based on your specific circumstances."

Tags: AAPL, AKAM, Akamai, Amazon, Amazon.Com, AMZN, Apple, CBS, CDN, CRM, ESPN, Hewlett-Packard, HPQ, Hulu, Level 3, Limelight, LLNW, LVLT, Microsoft, MSFT, Netflix, NFLX, Salesforce.com