Akamai Falls on Outlook, Revising Estimates
Akamai (NASDAQ:AKAM) recently released its Q1 earnings and based on its outlook for the year, we have updated our price estimate to $35 .07, which is now slightly above the market price. Below we discuss more as to what is happening. Akamai competes against other content deliver network players like Limelight Networks (NASDAQ:LLNW), Akamai competes with other players like InterNAP Network Services (NASDAQ:INAP) and Level 3 (NASDAQ:LVLT).
Weakened Media Vertical
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During our last price update, we estimated media content deliver business for Akamai to be its most important segment. However given company’s recent statements, e-commerce seems to be back in the driver seat for growth once again.
Akamai stated in its recent earnings:
Revenue from our media and entertainment customers grew 15% year-over-year and declined 4% sequentially in the first quarter, driven by contract renewals at lower price points from some of our largest media customers. Value-added services revenue in this vertical actually grew 7% sequentially. ((Akamai’s Q1 2011 earnings transcript, SeekingAlpha))
What this means is that even though traffic is growing, there is and will be price competition. Despite growth in value added services, media revenues declined sequentially as customers renewed contracts at lower price points. This could weigh on Akamai’s growth in revenue per media customer as more and more customers renew their contracts in future. As a result, we have toned down our forecasts for the same. We now estimate that media content delivery (including value added services) constitutes about 32% of Akamai’s value.
High-Tech Vertical Showed Declines
In addition to some weakness in media content delivery segment as a result of price competition, the high-tech vertical showed revenue declines compared to Q1 of 2010 as well as Q4 of 2010. This was a result of lower software purchases and implies slowdown in growth of revenue per customer for this vertical. High-tech vertical essentially refers to Akamai’s business of facilitating the download of softwares online and delivering online games. We estimate that this business segment constitutes about 11% of Akamai’s stock.
You can see the complete $35.07 Trefis price estimate for Akamai’s stock here.