Akamai’s Cloud Has A Silver Lining

Grazed from Seeking Alpha.  Author: Editorial Staff.
 

Content delivery and cloud infrastructure company Akamai (AKAM) sees opportunity in cloud computing, mobile computing, online video and Internet security. The company is in the process of diversifying its business into these other areas besides its bread-and-butter content delivery business.

Five years ago Akamai did not embed its technology into other company’s products or embed other company’s technology into its own, but the company is currently working closely with other companies to do just that. Examples of the companies Akamai is partnering with include telecommunications company Ericsson (ERIC), telecommunications company Qualcomm (QCOM) and wide area network company Riverbed Technologies (RVBD) discussed in this article…

Akamai is working with Ericcson to introduce Ericcson’s Smart Cloud Accelerator solution which embeds Akamai’s technology in Ericcson’s SSR 8000 routing gateways.

The company also announced it is working with Qualcomm to optimize delivery to mobile devices using Qualcomm’s Snapdragon chipset.

Akamai noted in its Q2 2012 earnings call held on July 25, 2012, the company is selling product related to the Riverbed Technology partnership. Riverbed and Akamai have a partnership for delivering the Steelhead Cloud Accelerator which combines Akamai’s public Internet optimization with Riverbed Technologies’ wide area network optimization.

In Q2, Akamai recorded record revenues of $331 million which represented 20% growth year-over-year and also grew earnings to $0.43 per share or 23% growth year-over-year. The company reported strong demand across key market segments, with sales of cloud infrastructure related products experiencing accelerated growth of 22% year-over-year.

Akamai’s international sales clocked in at 27% of total revenue and saw accelerated growth in all European and Asia-Pacific markets. The company noted caution in Southern Europe related to the sovereign debt crisis occurring in the region.

The company noted its Contendo acquisition, which brought revenue and customers, is progressing as planned. Additionally, Akamai’s Blaze acquisition, which in contrast did not bring revenue and a large customer base, is proceeding with the development of new products related to the acquired technology.

Akamai announced seven new products in the first half of the year and expects to announce additional products in the second half of the year.

The company forecast Q3 revenue of $332 million to $342 million for which the midpoint guidance represents 20% revenue growth year-over-year.

After Akamai reported its strong Q2 results, its stock price took a significant jump in price as shown below:

Akamai’s stock price is currently trading around $35, which is below its $39 peak hit in February and April of 2012.

In a series of articles, a Bull-Put credit spread has been considered for the company, as the market appeared to have underestimated the future potential for Akamai.

The initial 2012 May 28/31 Bull-Put credit spread started getting into trouble, so it was rolled to a series of farther out-in-time bull-put credit spreads after which the aggregate potential return now stands at 17%. With the latest spike in Akamai’s stock price, the current 2012 Nov 21/26 bull-put credit spread is significantly out-of-the-money, so an analysis for additional management of the position is in order.

The 2012 Nov 21/26 Bull-Put credit spread can be exited for a net debit of $0.39 as illustrated by PowerOptions tools and shown below:

(click to enlarge)

Based on this, the current position can be exited and the aggregate profit realized would be about +8.5%. However, continued management for the position could be performed in order to increase the current 17% potential return even further.

Analysis for rolling the position closer in time is first investigated, as shorter time frame options decay faster than farther out-in-time options. Analysis for rolling the position in to August options did not reveal any attractive positions, but an analysis for September option expiration revealed a possibility of rolling to the 2012 Sep 27/32 Bull-Put credit for a credit of $0.57 as shown below:

(click to enlarge)

The $0.57 net credit combined with the $0.39 net debit for closing the current position, results in a total net credit of $0.18 ($.57-$0.39) which increases the potential return about 3.5%.

Based upon increasing the potential return by 3.5%, rolling the 2012 Nov 21/26 Bull-Put spread to a 2012 Sep 27/32 Bull-Put spread results in improving the aggregate potential return to 20.5%. The specific trade information for rolling is shown below:

Roll Bull-Put Credit Spread Trade

• Sell to Close AKAM 2012 Nov 21 Put at $0.16
• Buy to Close AKAM 2012 Nov 26 Put at $0.55
• Sell to Open AKAM 2012 Sep 32 Put at $0.69
• Buy to Open AKAM 2012 Sep 27 Put at $0.12

Alternatively, an investor not currently in the 2012 Nov 21/26 Bull-Put credit spread position can enter the 2012 Sep 27/32 Bull-Put spread which has a potential return of 12.9% (90.3% annualized) and a time frame for realizing the potential profit of 52 days. The details for entering the Bull-Put credit spread are shown below:

Bull-Put Credit Spread Trade

• Sell to Open AKAM 2012 Sep 32 Put at $0.69
• Buy to Open AKAM 2012 Sep 27 Put at $0.12

A profit/loss graph for one contract of the AKAM 2012 Sep 27/32 Bull-Put credit spread is shown below:

For a stock price above the $32 strike price of the short put option at expiration, the position is fully profitable. For a stock price below the $27 strike price of the long put option at expiration, the position results in a total loss, however, the position should be rolled or exited prior to realizing a loss at expiration.

A management point of $33.50 is set for the new Bull-Put credit spread. If the price of the stock drops below the $33.50 management point, the position should be managed for an exit or a roll.