Akamai – Digital Media Rising but Stock Falling
Akamai (NASDAQ:AKAM) is a content delivery company that delivers web content for its customers and competes with other players like InterNAP Network Services (NASDAQ:INAP), Limelight Networks (NASDAQ:LLNW) and Level 3 (NASDAQ:LVLT). The contribution of the media content segment to Akamai’s overall business value is increasing, with 2010 showing an increasing customer base and a rebound in revenues (See Media Content Delivery Becomes Largest Value Driver for Akamai).
Our price estimate for Akamai stands at $37.11 which is in line with market price.
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Akamai’s stock, which shot upward in 2010, has dropped a healthy share of this gain in 2011, falling from a peak of over $54 to below $37. It is interesting to see Akamai’s stock decline despite strong indications of a rise in digital media. Notably, Akamai’s recent drop puts its market price in line with what we believe to be the company’s intrinsic value ($37.11).
Digital Media Rising
It is far from news that digital media is on the rise as more and more content shifts online. This includes entertainment content like video, audio and gaming as well as business content. Netflix is a prime example of the increasing digitization of entertainment content, as Netflix accounts for as much as 20% of the U.S. web traffic during peak hours – all thanks to the growing popularity of streaming. [1]
The popularity of online games and e-commerce are other driving factors. This is a broad trend, with some of the more recent notable moves attributable to Amazon (NASDA:AMZN), Facebook and News Corp (NASDAQ:NWS).
Amazon is offering its Amazon Prime members free access to video streaming content, adding a new layer of demand to this market (see How Amazon Prime Video Streaming Can Compete with Netflix). Even Facebook has made moves to enter this arena. The social networking site is experimenting with Time Warner’s (NYSE:TWX) movies to allow users to rent or purchase content using Facebook Credits (see Credit Facebook for New Time Warner Content Offering).
These developments are not just limited to video. News Corp recently announced a digital magazine specifically designed for the iPad, marking an important step in the digitization of traditional paper media (see News Corp Launches Digital Magazine, but Stock Still Depends on “Old Media”).
This is all great for Akamai’s business, so what is happening to its stock?
Competitive Pressure Weighing on Aakamai
We believe that Akamai’s previous stock price surge was driven more by excitement rather than fundamentals. We’ve previously posed the question – Is Akamai’s stock price justified? Now it seems that investors might be cautiously considering the force of heightened competition on Akamai’s valuation. A recent article noted:
“Akamai Technologies fell 15 percent after the company said competitors are forcing it to offer lower prices for its Web streaming services.” [2]
Surely, the climb to the top is tough. But holding off competitors is often a bigger challenge. Akamai’s competitors will likely use any and all tactics to grab a larger slice of the content delivery pie and ultimately develop more competitive value-added services as well.
See our full analysis and $37.11 price estimate for Akamai’s stock
Notes:- Wired: Netflix Instant Accounts for 20 Percent of Peak U.S. Bandwith Use, October 2010 [↩]
- Cisco, Akamai pull technology stocks lower, Yahoo News, Feb 10 2011 [↩]