AKAM reports 4Q09 earnings tonight after the market close. The analyst community is widely divided making strong arguments for Strong Sell rating as well as Strong Buy. Regarding valuation and outlook, here is an excerpt from Credit Suisse issued on Dec 7, 2009:
"AKAM stated that the first two months of the Dec'09 quarter tracked above the company’s expectations driven by strong volume growth particularly with the commerce and media verticals. While the company expects traffic volumes to continue to improve in the near term, AKAM lowered margin expectations for long-term model vs. prior levels of its “billion dollar plan.” Specifically, the company expects long-term gross margins of 76-78% and EBITDA of 45-47%, compared to previous long-term guidance of gross margins of 77-79% and EBITDA of 47-48%. While the company cited continued investments and tactical acquisitions as necessary growth vehicles for the long term, we continue to believe that AKAM's margin structure has already peaked. Additionally, the company will only report a fully-taxed pro forma EPS next year utilizing a tax rate near 40%, as opposed to consensus estimates that utilize a 6.5% tax rate (due to NOLs, which will expire in 2011). On a fully-taxed basis, AKAM trades at an expensive valuation, and we remain concerned that AKAM's margin structure has likely peaked and that the company could continue to face growth headwinds near-term as M&E Web video business models are refined and operators close operations, reduce incremental investments, or seek lower-cost alternatives."From a technical perspective, AKAM is up nearly 60% since Sep'09. I think the bulls need to pause and digest some of those gains, I think the bears will continue to point out lower margin.
As such, I am slightly bearish-to-neutral going into the earnings. I think the stock can retest $24-$25 range. Instead of outright going negative, I want to do a trade that takes advantage of elevated implied volatility in Feb of 55 vs. 43 in March, and also gives me some cushion if the stock goes higher. Specifically, I like the following Double Diagonal Calendar Spread:- Buy to open March 24 calls
- Buy to open March 26 puts
- Sell to open Feb 24 calls
- Sell to open Feb 26 puts
The whole spread can be done for a net debit of $0.75 or less as of this writing. The potential P&L chart is attached. I like the odds.
One quick note: as with any earnings trade, I never overextend my stay. I am in it for earnings and I will be out within a few minutes tomorrow morning. Also, keep small position size as this is not a long-term investment.
Good luck!
