Akamai Technologies (NASDAQ:AKAM) stock has been stuck in a descending channel for almost a year. This earnings report could be its ticket out it.
Last night, it reported earnings and, so far, Wall Street likes what it saw. Management beat on all relevant metrics and guided a strong quarter ahead on strong demand. One could find fault in some expenses but these are growth companies and they need to spend to maintain their growth. As long as they meet the bottom line expectations, costs are not an issue.
We now live in a world where technology is part of almost every aspect of it. So as we transition our daily activities online, crime will follow. The cloud, as popular as it has become, thanks to Amazon (NASDAQ:AMZN), creates new opportunities for criminals to exploit.
Last year, the issue of privacy came to light in a big way thanks to Cambridge Analytica and Facebook (NASDAQ:FB). Public opinion matters, and I bet companies are scrambling to plug every vulnerability point so they don’t fall prey to hacks.
This is all to say that Akamai and its competitors will have years of strong demand on their services. Because the migration to the electronic world is still in its infancy stage. This is a trend with staying power.
Fundamentally, Akamai stock is not cheap. It sells at a 46X price-earnings ratio. This is expensive in absolute terms, say, compared to Apple (NASDAQ:AAPL), which sports a P/E of 14X. This is also three times more expensive than Juniper Networks (NYSE:JNPR) and NetApp (NASDA:NTAP). So buying it for value is not the argument here.
Coming into the earnings report, AKAM stock sported a bullish pattern that had $75 as a target. For the short term, AKAM stock has had a big 21% rally off the December lows. From here, it should face resistance as it approaches prior pivot levels. But these same resistance points if the bulls can overcome them become breakout triggers for momentum traders.
Over the longer-term, the chart is not that pretty. The daily chart shows that AKAM stock is in a descending channel since last June. It has been setting lower higher and lower lows for months. Here it is against at the upper edge of that channel where typically it fails.
This happened back in early December and they the stock failed miserably. What is different this time is the overall sentiment. Back then, the stock market was falling precipitously on high fear levels.
Technically, the zone between $68 and $71 per share has been pivotal for almost five years. AKAM has traded above it but it was labored and it didn’t last. And the corrections out of the zone resulted in corrections of 30% over two months of selling.
So those who want to trade the potential of this breakout here have to study the short-term charts closely and set the stop losses accordingly. Otherwise they may be stuck in a long-term investment and not a trade. These corrections have rebounded in the past but they took months. This all depends on the trader’s intentions of course.
Bottom Line on AKAM Stock
This morning the stock is trading above $68.51, which was a trigger level on a bullish cup-and-handle pattern targeting $75 zone. AKAM is also approaching a very important line at $70.50. If the bulls can close above it then would trigger a buy signal on the four-hour chart. This was the last major fail level from Dec. 3.
If that happens, it would confirm the first breakout pattern and more importantly give it enough momentum to clear the dreaded long term descending channel. That breakout would be more important than the others that brought it to here.
The Wall Street analysts have not given up on the stock. They are split between BUY and HOLD and it is trading well below their average price targets. So if the bulls can follow through with the breakout of the channel, AKAM could have a long way to go especially if the markets, in general, continue their rally.
Conversely, losing $66 per share would open the hatch to $63.74, which is a potential trap door to $62 per share. Those are not forecasts but levels I need to watch.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.