Tuesday, November 9, 2010

Netflix Story is No Reason to Sell Akamai

By David Gross

Akamai is down nearly 5% today after CDN expert Dan Rayburn published a story in Seeking Alpha saying that Netflix is leaving Akamai, and handing over its business to Level 3 and Limelight.   While he says he cannot precisely nail down how much revenue is associated with this, he estimates it's $10-$15 million.     So Wall Street is knocking the company down 5% for losing what amounts to 1% of annual revenue.   Yet another emotionally charged expectations multiple, although the 5 here (5%/1%) is lower than the double digits we've seen with Riverbed and Equinix.

The flip side is that not only is Limelight soaring, but Level 3 is out of the delisting zone, back over a dollar, which is an important development considering it got warning from NASDAQ last week due to its stock spending too much time trading under a buck, which means it would need to reverse split or hold above a dollar to avoid being booted down to the OTC market.

Level 3 is up 14% on this news, which like Akamai, would get about a 1% shift in revenue based on Rayburn's estimates, which means its getting an expectations multiple of 14, almost as high as Equinix's record 17 when it dropped 35% after guiding down 2%.  What makes this even sillier is that Akamai's cost structure hasn't changed a bit, and it still spends half as much per dollar of revenue on bandwidth as Limelight, and generates more revenue from CDNs than Level 3 does from managed hosting, colocation, Ethernet, wavelengths, IP/VPNs, wireless backhaul services, managed WAN Optimization, SIP Trunking, Wholesale VoIP, PRIs, and CDNs combined.

Part of the reason there is such an overreaction from the manic buyers and panic sellers on Wall Street is that the customer is Netflix, which is heavily followed, and whose executives can't go to the bathroom without some analyst pondering the greater meeting.   If a less exciting Akamai customer, like the Food and Drug Administration, or the National Center for Missing and Exploited Children, was going over to Level 3 or Limelight, I seriously doubt we'd see this response, even if the revenue opportunity was the same.

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