Why we believe Akamai is fairly valued

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Akamai

Akamai (NASDAQ:AKAM) had a stellar 2014 and its stock price is up over 30% year to date. The company reported strong numbers for the third quarter and displayed growth across all its reported business segments and geographies. This growth is likely to continue and will be driven by the secular trends of more business being conducted online, increased online content and traffic, content providers striving to improve the experience of their users and the increased demand for faster and safer content delivery. We believe that Akamai is fairly valued and our price estimate for Akamai stands at $61.70. This price estimate is based on our expectation that the company can increase its revenue by 1.9x from an expected $2.0 billion in 2014 to $3.8 billion by the end of our forecast period. We expect the company to accomplish this by growing its customer base by 1.25x during the same time frame, with the remaining growth coming from an increase in its average revenue per customer.

See our complete analysis for Akamai here

Growing Media Consumption And E-commerce Adoption

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According to our analysis, media content delivery and online shopping content delivery are Akamai’s most valuable business segments. Akamai offers the leading content delivery network to accelerate and improve the delivery of media content over the Internet. Internet users are spending a great deal of their time online and large media companies and retailers are taking steps to move their content offerings online as well. The increase in the consumption of online content has made various companies such as Yahoo, Thompson Reuters, NBC, Best Buy, and others to procure Akamai’s services. We expect the number of customers for Akamai’s media content delivery segment to reach 1,290 at the end of 2014, and further project the figure to go up to 1,640 by the end of our forecast period. Similarly, we expect the number of customers for Akamai’s online shopping content delivery segment to reach 2,560 at the end of 2014 and further forecast the figure to touch 3,310 in the next six to seven years. Akamai’s revenues are proportional to the data consumed, so the growth in online activity is lending support to Akamai’s average revenue per customer in both its media and online shopping segments. We believe that the company’s average revenue per media content customer will be around $669,000 for the year 2014, and could go past $1 million by the end of our forecast period. The corresponding figure for online shopping segment is likely to hit $428,000 over the same timeframe.

Enhancements In Akamai’s Value-Added Services

Akamai’s value-added services are also a major draw for its customers. These services have contributed around 60% of overall revenues in recent quarters and also have higher margins than content delivery. According to a recent report by Akamai and Streaming Media titled State of CDN Services, 91% respondents of the survey conducted for the report said they wait less than 5 seconds before abandoning a video and 92% said that content quality is important or very important to their overall online viewing experience. [1]  Akamai provides cloud networking solutions which the company says help in accelerating the speed of applications, reducing bandwidth costs and bringing the Internet and public clouds into private networks. It entered into a partnership with China Telecom Corporation Limited’s cloud division CT Cloud this year to offer quality cloud services to its users. Among the various value-added solutions that Akamai sells, security products are growing the fastest. Akamai acquired Prolexic this year which will help boost Akamai’s sales going forward. Akamai will integrate the acquired technology into its flagship Kona Site Defender and will leverage 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. We expect that Akamai will continue to improve its value-added services in order to enhance the experience of its customers and distinguish themselves from its competitors.

Potential Headwinds

Pure-play CDN is becoming increasingly commoditized. Akamai is facing increased competition from rivals such as Level 3, Limelight, Edgecast, and more recently, Amazon which has heightened CDN pricing pressure in recent years. However, Akamai has been bolstering its performance and has been improving its value added services through new launches and acquisitions. This will help it mitigate the impact of the Pure-play CDN commoditization and will help it grab a bigger share of the consumers.

Another potential headwind could be the fact that large companies such as Apple are trying to build their own content delivery networks. Apple is an important client for Akamai and is reported to have delivered updates to its operating system through its own content delivery network this year. [2] However, Apple is still using Akamai’s services and any shifting to their own content delivery network will be a phased and prolonged project. There are fears that this trend might catch on and other customers might decide to follow in Apple’s footsteps but the resources and time required for establishing their own CDN will not make economic sense for most of Akamai’s clients.

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Notes:
  1. Streaming Media, State of CDN Services. []
  2. Apple’s iOS 8 included one more surprise, Deepfield []