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Akamai Must Offer Proof, Not Promises, To Investors

Last week I overheard a Boston venture capitalist bemoaning his recent investment in content delivery software vendor Akamai Technologies. I don't know when he bought in, but judging from his slumped demeanor and disconsolate tone, I'm guessing it was around mid-July, when Akamai was priced over $125.

Since then, shares have been felled by a triptych of investor concerns regarding insider selling, widening quarterly losses and projected spending increases. By last Wednesday, Akamai had closed at $68.63, or 46% below its July 13 close of $127.06.

And even though Akamai shares rebounded late last week, Friday's closing price of $77.38 left the company's stock down 79% from its Dec. 31 close of $327.63.

I don't blame our VC friend for being disappointed. Akamai's mid-summer meltdown reversed nearly two months of steady gains that saw shares more than double from their May 26 closing price of $59.94, and leaves AKAM with the worst year-to-date performance of any major Internet infrastructure player. And with investors skittish about insiders selling off AKAM shares as the lock-up period expires this month and next, it may be a while before the stock can sustain upward momentum.

So does that make Akamai a bargain stock now? It's hard to say, because even the rough-and-ready Internet valuation metric of market capitalization as a multiple of trailing 12 months' revenue can't be applied because the company only began generating significant sales late last year.

That said, what evidence we do have of revenue growth is impressive. In its Q2 report released July 24, Akamai showed revenues of $18.1 million, a 151% increase over Q1's $7.2 million. A few more quarters like that, and the caching server software seller will be racking up triple-digit sales figures. It already has surpassed rival Digital Island , which has a longer operating history but only $16.1 million in revenue during its most recent quarter.

Right now, however, investors are focusing on Akamai's bottom line, which is writ large in red. Q2 net loss, excluding $199.4 million in amortization and options-related costs, was $43.4 million, or 50 cents per share. That beat estimates of 57 cents per share, but Wall Street is no longer giving out free passes for exceeding expectations, especially of the "lower net loss than forecast" variety.

And if you include amortization and other costs, AKAM had a Q2 loss of $243.2 million, or $2.78 per share, which puts that $18.1 million in revenues in sobering perspective.

The upside of that Q2 debt is it enabled Akamai to build a $515.7 million war chest of cash and short-term securities through a $300 million convertible debt offering in June. This will allow Akamai to absorb further heavy losses for several quarters without running out of cash.

Despite the red-ink bath Internet tickers have had this year, Wall Street still believes fervently in infrastructure plays. That's why some of the top-performing stocks YTD belong to companies such as Juniper Networks and Inktomi , and why router maker Avici Systems , another Boston-area company, bucked a weak IPO market to triple on its first day of trading on July 28.

But Juniper and Inktomi are profitable. For Akamai to get the level of support those stocks are receiving, it will have to begin moving toward, and not away from, profitability. At least that's when I will become a believer.