CDN Pricing Trends Hurt Akamai Shares

Shares of content delivery market leader Akamai (AKAM) are lower this morning on concerns that industry pricing pressures will hurt the company's performance.

Shares of content delivery market leader Akamai (AKAM) are off about 9 percent this morning on concerns that industry pricing pressures will hurt the company's performance. Several securities analysts analysts downgraded Akamai, and the company's shares are trading down $1.52 at $15.60, a decline of 8.9 percent.

The downgrades followed the release of the latest CDN pricing survey by Dan Rayburn at Rayburn noted that pricing was lower for customers with average bandwidth capacity requirements, and that Akamai's pricing remained higher than other providers.

"In the last two weeks, I have seen three RFPs where the major CDNs all bidding on the business were priced within four cents of each other," Dan writes. "The exception to the rule was Akamai who was coming in at almost double to what all the other CDNs were charging and it should be noted, did not win any of those three deals."

Rayburn has consistently said that worries of a "pricing war" were overdone, and restated that view. "For those that think pricing will only continue to drop, think again," he writes. "Once customers start pushing a lot more traffic, they will be at a level where the CDNs can't discount it much further or they risk losing money."

The more competitive pricing is good news for digital video companies and other CDN customers, as noted by Dan Frommer at Silicon Valley Insider. But securities analysts were clearly spooked by the pricing data. Eric Savitz at Barrons summarizes the analyst calls:

  • Goldman Sachs analysts downgraded Akamai from Hold to Conviction Sell, saying " “aggressive competition continues to mount…with little end in sight to potential pricing pressure, resulting in significant downside risk to longer-term estimates.”
  • Wedbush Morgan also cut its rating on Akamai today, going to Hold from Buy,  citing “industry and customer checks that indicate that the economy and competition could diminish financial performance resulting in weaker than expected guidance.”

Then again, the Wedbush analyst trimmed his "target price" for Akamai from $23 to $20. The only problem is that AKAM shares are trading at $15.43 right now. If the analyst really believes Akamai will trade in the future at $20, shouldn't he be recommending a "Buy" at these valuations?

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