Akamai (NASDAQ:AKAM) makes money by delivering web content on behalf of websites to end users through its vast network of servers. The company also earns significant revenue from value-added services offered alongside content delivery services.
Akamai’s margin accretive value-added services business is now starting to attract competition from the likes of Liemlight, Contendo and CDNetworks. However, we believe that Akamai does not face any immediate threat from these players.
Below we discuss importance of value-added services to Akamai, why competition is not an immediate threat to the company, and how intensifying competition over the long term could result in a slight downside to $26 Trefis price estimate for the Akamai’s stock.
Value-Added Services Are Key To Akamai
- More than 50% of Akamai’s revenues can be attributed to its value-added services like advertising decisions, application performance, and dynamic site solutions that the company offers its customers in addition its content delivery service.
- Value-added services generate higher margins, making them a profitable business as well as a source of revenue diversification for Akamai.
- Over 75% of Akamai’s customers buy at least one value-added service, and this has been the prime growth driver for its online shopping content delivery business, which constitutes around 36% of Akamai’s stock price.
Akamai Is Seeing Competition for Its Value-Added Services
In 2009, Limelight launched value-added services for enterprises, government and the commerce sector, expanding its reach with 200 new customers. Contendo is focusing on application acceleration, one of the key value-added services that Akamai offers, while CDNetworks plans to launch a new application acceleration offering that may pose competition to Akamai eventually.
No Immediate Threat, But $1 – $2 Downside to AKAM Stock If Competition Intensifies
Akamai has a huge share with a broad portfolio and established customer relationships in the value-added services market. Although Akamai will continue to face competition in the future, the competitive threat is not imminent as Akamai has a strong foothold in the market with additional service offerings that its competitors lack.
Akamai has started to get competitive on CDN pricing, and this should help the company retain as well as expand its customer base. Akamai can leverage its larger base by offering value-added services alongside its primary content delivery service.
However, if competition intensifies, this could potentially lead to a slowdown in growth of revenue per customer for Akamai. This could translate into downside of roughly $1 to $2 for Akamai’s stock.
You can modify our forecast above to see how reduction in growth of revenue per online shopping customer can impact Akamai’s stock.
For additional analysis and forecasts, here is our complete model for Akamai’s stock.