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Investment Overview for Akamai (NASDAQ:AKAM)
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Below are key drivers of Akamai's value that present opportunities for upside or downside to the current Trefis price estimate for Akamai.
Online Shopping Content Delivery
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Revenue Per Akamai Online Shopping Customer: We estimate that this figure will increase from about $212,000 in 2011 to about $311,000 by the end of our forecast period. However there could be a potential upside of more than 6% to our price estimate if this figure was to reach past $360,000. On the other hand, there could be a downside of about 6% if this figure declines to about $260,000 by end of our forecast period.
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Number of Akamai Online Shopping Business Customers: We estimate that this figure will increase from about 1940 in 2011 to a little over 2800 by end of our forecast period. However there could be a potential upside of more than 13% to our price estimate if Akamai can double its online shopping customer base by end of our forecast period.
Media Content Delivery
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Revenue Per Akamai Media Business Customer: We estimate that this figure will increase from about $470,000 in 2011 to a little more than $600,000 by the end of our forecast period. However there could be a potential upside of more than 10% to our price estimate if this figure were to reach $850,000 by end of our forecast period. On the other hand, there could be a downside of about 10% if this figure declines to just around $400,000 by the end of our forecast period.
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Number of Akamai Media Business Customers: We estimate that this figure will increase from about 1040 in 2011 to a little under 1400 by the end of our forecast period. However there could be a potential upside of about 15% to our price estimate if Akamai can double its media customer base by end of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Akamai at the top of the page.
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Akamai operates a worldwide network of over 100,000 servers that help Akamai's customers deliver Internet content faster to their end users. The company estimates that it delivers 15-30% of the global web traffic. Websites like Netflix, Yahoo!, Facebook and Travelocity use Akamai for content delivery, which means that some of the content you view when visiting these sites is delivered from a nearby Akamai server, rather than the company's own servers.
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We believe Online Shopping Content Delivery and Media Content Delivery are the most valuable segments within Akamai for the following reasons:
Large Number of High-Margin Online Shopping Customers
Although the revenue per customer for media content customers is higher than that of online shopping customers, we estimate that Akamai had close to 2,000 online shopping customers, about double as many as for its media content delivery business by the end of 2011. Moreover, the margins for this business are higher than media due to the comparatively low bandwidth requirements for online shopping as compared to watching videos et al.
Value-added services such as transaction security is an important part of delivering content for online shopping sites. Akamai provides transaction security for commerce sites, such as Best Buy, Domino's and Travelocity.com. These services help Akamai retain customers in the commerce and financial services space.
Apart from security, other value added services like advertising decisions, dynamic site acceleration services etc have helped Akamai in winning and retaining large number of online shopping customers. Close to 60% of Akamai's revenues can be attributed to such services.
High Growth & High Revenue for Media Content
The delivery of media content, such as images and video, is a huge growth area for Akamai and other content delivery networks. Akamai helps customers like ESPN, Netflix, Apple and Yahoo! deliver data-intensive media content faster to internet users. The worldwide demand for Internet media is expected to increase significantly due to rising broadband penetration and growing prevalence of HD video, such as Youtube, Netflix and Hulu.
We estimate that Akamai earned ~$470,000 per media content customer in 2011, compared to ~$212,000 per online shopping content customer. Content delivery pricing is largely a function of the amount of data that is delivered and media customers generally have much higher bandwidth requirements than online shopping customers.
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Focus on Value Added Services
Akamai's value proposition has evolved beyond being the fastest content delivery network. As competitors grow increasingly capable of fast content delivery at similar prices, Akamai has positioned itself as a full services provider--touting its ability to offer multiple value-added services, such as the delivery of targeted advertising and cloud-based services for its customers. Value-added services now account for close to 60% of Akamai's overall revenues and have higher gross margins compared to basic content delivery.
Its recent acquisitions of Cotendo and Blaze should help it bolster its value-added portfolio and reduce competition in this area. It will also help it protect its margins as competition intensifies in its core content delivery business.
Media Content Rising - Margin Pressure
Media content is rising at a significant pace as more amount of video moves online and video quality increases (for example HD video). Some of the services that are stimulating this trend are Netflix, Hulu and Youtube. Although growing media demand is an opportunity, it is also a source of gross margin pressure, since one of Akamai's largest costs is the cost of bandwidth to deliver data. Akamai passes on some of these costs to customers in the form of a bandwidth usage-based pricing structure; however, Akamai's pricing will be under pressure from volume discounts and competition from other content delivery networks.
Akamai Getting Competitive on Pricing
Akamai has historically charged premium prices to its customers for fast and secure delivery of their web content. However, the company is increasingly competitive on pricing, particularly on video content, in an effort to attract more customers and traffic to its network. In several deals, it has even outbid its competitors on price. This is likely to win more customers for Akamai but may put pressure on margins.
Growth in Mobile Web Traffic - Both Risk and Opportunity
The company is also taking steps to move into mobile networks. Mobile traffic growth is both a result of stimulation of higher internet usage as well as the shift of some traffic from wireline to wireless networks. This shift of data usage could pose a risk for Akamai’s wireline CDN business if it does not quickly capitalize on mobile web growth.
However, some of Akamai's recent steps show that it has started to take mobile data growth seriously. Some of the steps taken in this direction include the acquisition of Velocitude and partnership with Ericsson. The recent Cotendo acquisition gives Akamai an existing mobile acceleration suite that will help it further its interests in the domain.
Trefis Forecast Rationale for Media Business Gross Margin
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Gross Margin represents Gross Profit as a percentage of Revenue. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold.
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${forecast} has historically been lower than gross margins in other segments, such as Online Shopping and Software & Games due larger volume discounts. Bandwidth usage by Akamai's media customers is among the highest of all customers due to the nature of content being delivered (e.g. images and videos). Since bandwidth usage is both a primary means of pricing Akamai's service and a primary area of cost, margins have been and are expected to be lower within media.
These margins have hovered a little over 75% until 2011 when it fell below 73% due to competitive pressures. Going forward, we expect the ${forecast} will remain at current levels with a slightly positive bias due to the impact of its Cotendo and Blaze acquisitions.
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Trefis considered the following factors for its forecast:
- Acquisitions to boost value-added services
- Akamai's recent acquisitions of Cotendo and Blaze should help it bolster its value-added portfolio and reduce competition in this area.
- Value-added services, such as dynamic site acceleration services, transaction security and cloud-based solutions help Akamai protect its margins from the pricing pressures of competition as these services tend to have much higher margins than its core business of content delivery.
- Value-added services have grown to account for close to 60% of revenues every quarter.
- High media customer bandwidth usage
- We expect Akamai's media customers to remain among the largest bandwidth users.
- The transition to HD content may put further strains on margins with increasing bandwidth usage. HD content consumes 10 times the bandwidth of standard definition content.
- Akamai expects a growing number of its customers to offer HD experience over the web in the coming years.
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More competition--especially from telecom carriers like AT&T
- Beyond already strong competition from traditional content delivery network (CDN) players like Limelight and Level3, carriers like AT&T are also aggressively moving into the CDN space and have shown the willingness to spend aggressively to ramp their platforms. The huge financial and management resources of carriers make them a very potent competitor to Akamai.
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Pricing pressure will affect margins
- We expect pressure on pricing, as Akamai would have to continue to give volume discounts to its largest customers to keep them within the Akamai fold.
- It has become quite evident recently that Akamai is now getting competitive on pricing, especially with media customers. In some case the company has even outbid its competitors on price.
- With premium on its core CDN pricing diminishing, margins may come under pressure if core CDN margin erosion is not supported by value-added margins.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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