Akamai Cruising Along With Well-Rounded Growth

Internet content delivery company Akamai (NASDAQ:AKAM) has entered the second half of 2014 with all engines firing. The company demonstrated well-rounded growth across geographies and reportable segments in the second quarter of the year. While the World Cup did drive some of this, Akamai’s business remained fundamentally strong with continued ramp up of content delivery as well as value added services. Content delivery is growing, primarily due to rising demand for software downloads, gaming, online video consumption and social media. As far as value added services are concerned, Akamai continues to see strong adoption across the board. The segment’s revenues in the second quarter jumped, especially due to the acquisition of Prolexic. Excluding the impact of the acquisition, revenues still witnessed healthy growth due to demand for cloud security services and web performance. These services have high margins, which suggests that despite the commoditization of content delivery business, Akamai can improve, or at least sustain, its margins in the near term.

Our price estimate for Akamai stands at $61, implying a slight premium to the market price.

See our complete analysis for Akamai here

User demand for high quality content driven by new formats such as 4K and ultra-HD, which require higher bit rates than normal, means that bandwidth requirements are likely to increase significantly in the coming years. With the adoption of 4G LTE rising in developed markets and carriers in emerging markets looking to transition to the standard, mobile data usage is also set to surge. According to a recent Cisco VNI report, mobile data traffic grew 81% in 2013 and is expected to grow at a CAGR of over 60% over the next five years. ((Global Mobile Data Traffic Forecast Update, 2013–2018, Cisco, February 5th, 2014)) Akamai, which delivers 15-30% of all web traffic, stands to benefit hugely from this huge surge in online traffic.

Among the various value-added solutions that Akamai sells, security products are seeing the fastest growth. In Q1 2014, security revenues grew 26% over the same period last year and 3% sequentially. These figures jumped to 30% and 10%, respectively, in the second quarter, owing to the impact of the Prolexic acquisition. The move should help bolster Akamai’s sales going forward, as it integrates the acquired technology into its flagship Kona Site Defender and leverages the combined user base to upsell solutions. Before Prolexic, Akamai had 867 customers using its security solutions with around 260 on Kona. Prolexic increased that user base by almost 50% to 1,250.

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