All Around Growth For Akamai Re-Affirms Our Valuation

Akamai’s (NASDAQ:AKAM) third quarter results were strong. The company displayed growth across its reported business segments or geographies. Even better, the growth is likely to continue, given the secular trends of increasing Internet content and traffic, the growing adoption of online streaming services and the ongoing push from network providers to drive data usage. We expect the there to be continued adoption of Akamai’s security services by businesses large and small as content owners and consumer shift online for media consumption and shopping. Overall, Akamai’s Q3 2014 results support our forecast and valuation, which stands at a premium of about 10% to the market.

Our price estimate for Akamai stands at $61.70

See our complete analysis for Akamai here

Snapshot Of Third Quarter Growth

Akamai saw strong revenue growth across all reportable segments without sacrificing much on margin front, suggesting a well rounded performance and relatively low business risk. Its overall revenues jumped 26% in the third quarter year over year with media delivery solutions growing by 22% and security solutions business registering 29% growth. ^[1] Even if we look geographically, we find that both International and the U.S. markets saw strong sales growth of 28% and 25% respectively. The company attributes this performance to better-than-expected media traffic, which usually tends to be low during summer months. As far as the next quarter is concerned, there are likely to be some headwinds due to currency movements, rather than business trends. However, considering the holiday season and Akamai’s recent performance, we expect the company to live up to its guidance. Overall, the results re-affirmed our forecasts and valuation for Akamai.

Akamai’s Q2 2014 ‘State of the Internet’ report states that global average broadband connection speeds grew by 21% sequentially in Q2 2014, and crossed the threshold of 4 Mbps for the first time. ^[2] Additionally, there are several countries with average broadband speed of over 15 Mbps, which is considered as a minimal threshold for 4K (ultra HD) transmission. User demand for high quality content for these new formats, 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.

Forecasts Behind Our Valuation

Our price estimate for Akamai stands at $61.70, implying a premium of more than 10% to the market. This price estimate is based on our expectation that the company can increase its revenue by 2.4X from $1.58 billion in 2013 to $3.75 billion in the next six to seven years. We expect the company to accomplish this by growing its customer base by 1.4X during the same timeframe, with the remaining growth coming from an increase in its average revenue per customer. However, there is some pressure on margins due to growing selling, general and administrative expenses and slight pricing pressure as the generic content delivery business has become commoditized. Therefore, we expect EBITDA to grow by only 2.13X in the next six to seven years.

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1. Akamai’s SEC Filings [↩]
2. September 30, 2014 – Akamai Releases Second Quarter 2014 ‘State of the Internet’ Report [↩]