AKAM - Akamai drops as RBC downgrades citing worries over 'clear change in strategy'

Akamai Technologies ( NASDAQ: AKAM ) reported better-than-expected fourth-quarter results on Tuesday, prompting investors to respond favorably, but a "clear change in strategy" on the earnings call reversed the gains and resulted in investment firm RBC Capital Markets to downgrade the stock.

Analyst Rishi Jaluria lowered his rating on Akamai ( AKAM ) to sector perform from outperform, noting the company is shifting towards focusing on compute and less on security, while also adding to operating expenses and capital spending pans for 2023.

"We shift to the sidelines as we believe this move alters the risk-reward profile, and we would wait for evidence it can pay off before getting back involved," Jaluria wrote in a note to clients.

Akamai ( AKAM ) shares fell nearly 6% in premarket trading on Wednesday.

Jaluria noted the shift in strategy is driven by the Linode acquisition and the fact that the company's Compute segment is slowing down. However, cloud computing is "hyper competitive" and the shift in strategy makes it seem almost as if Akamai ( AKAM ) is trying to compete with Amazon ( AMZN ), Microsoft ( MSFT ) and Google ( GOOG ) ( GOOGL ).

"For starters, if Akamai is successful, hyperscale cloud vendors can cut prices themselves (in fact, our checks indicate GCP has already been competing on price)," Jaluria wrote. "Plus, we note that Oracle ( ORCL ) tried a similar strategy with OCI bundling, with mixed success."

Jaluria added that Akamai ( AKAM ) has more work to do to compete with a company like DigitalOcean ( DOCN ), never mind going after Amazon ( AMZN ) and Amazon Web Services.

Last month, investment firm Guggenheim started coverage on Akamai ( AKAM ) with a sell rating .

Analysts are mostly positive on Akamai ( AKAM ). It has a BUY rating from Seeking Alpha authors , while Wall Street analysts rate it a BUY . Conversely, Seeking Alpha's quant system, which consistently beats the market, rates AKAM a HOLD .

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