Tickers in this Article: AKAM, LLNW, LVLT, GOOG, AMZN, IBM, CMCSA
Akamai (Nasdaq:AKAM) didn't make the internet, but the company's services do help it work better for companies and users. Unfortunately, Akamai is sandwiched between an increasingly commoditized legacy business, and a value-added service model that holds promise but a lot of uncertainty. Although its possible to construct a large and lucrative revenue scenario for Akamai, investors may want to wait for this relief rally to peter out before making a major commitment.

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A Mixed Third Quarter
Revenue rose 11% in Akamai's third quarter, split between 4% growth in the legacy volume-based service business, and 17% growth in value-added services. Among the company's addressable verticals, commerce was strong (up 23% from last year), and enterprise grew from a smaller base (up 30%), while media and entertainment growth was much more modest at 5%. While Akamai's last three quarters saw management talk down the numbers, this was the first "meet and maintain" in a while.

Profitability was nothing to really celebrate. The company's gross profit margin fell about two and a half points from last year. Operating income growth (on a generally accepted accounting principles basis) matched revenue growth at 11%. Unfortunately for Akamai, one of the bear theses on the stock is that the company has maxed out its margins and a quarter like this, with stagnant operating margins, won't help that argument.

E-commerce Is Still a Real Opportunity
To their credit, management realizes that last-mile content delivery is not going to butter their bread indefinitely. Value-added services like web site acceleration, advertising services and security have already helped the company stand out. What's more, the company's dynamic site acceleration has become a major part of its value-added service offerings, and an invaluable package of services to companies like Best Buy (NYSE:BBY), Apple (Nasdaq:AAPL) and Adobe (Nasdaq:ADBE).

Much as e-commerce has been with us all for over a decade, it's still a market with outsized growth potential. Certainly Akamai needs to worry about rivals, real or potential, like Google (Nasdaq:GOOG), Amazon (Nasdaq:AMZN) and so on, but there is plenty of opportunity to go around - particularly as digital media continues to grow so quickly.

Another Cloud Play?
Skeptics claim there's more sizzle than steak to cloud computing, but the reality is that it is changing the software industry. Cloud optimization services, then, could be a major opportunity for Akamai in the years to come - particularly if it can ally itself with infrastructure players like IBM (NYSE:IBM) or VMware (NYSE:VMW).

The Old Business
One of the issues with Akamai is the fear that the volume-based businesses will dissolve faster than the value-added businesses can evolve. To be sure, content delivery optimization is not new, or exciting, anymore, and rivals like Limelight (Nasdaq:LLNW), EdgeCast and Level 3 (NYSE:LVLT) have led many customers to look at it as a commodity service, where price is the principle distinguishing trait. Worse still, are the fears that communications companies like Verizon (NYSE:VZ), AT&T (NYSE:T) and Comcast (Nasdaq:CMCSA) will target this market and roll it into larger package offerings.

The Bottom Line
More than anything, it looks like the post-earnings action in Akamai is a relief rally that the company met its numbers and didn't lower guidance again. While there is certainly a lot to like in the company's e-commerce optimization, and the potential of cloud optimization is exciting, the stock does not look all that cheap right now. With other internet stocks like eBay (Nasdaq:EBAY), Amazon and Google out there, investors considering Akamai may want to at least let this relief rally cool off before jumping into the name. (For additional reading, see A Primer On Investing In The Tech Industry.)

At the time of writing Stephen Simpson did not own shares in any of the companies mentioned in this article.

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