Developments That Could Potentially Trigger Movement In Akamai’s Stock Price

Akamai (NASDAQ:AKAM) is the leading Content Delivery Network (CDN) provider and in fact delivers between 15-30% of all web traffic. ^[1] Our price estimate for Akamai stands at $70, implying a slight premium to the market. However, there are certain triggers and plausible developments that can move the stock’s value significantly in the next couple of years. Specifically, we believe that the loss of revenue due to high profile customers such as Apple developing their own delivery networks could result in a 10% correction, whereas accelerated growth in value-added services could lead to a 10% upside for the stock.

See our complete analysis for Akamai here

High Profile Clients Developing Internal Delivery Networks (~10% Downside)

The pure-play content delivery network (CDN) market is becoming increasingly commoditized. Akamai is facing increased competition from rivals such as Level 3 (NYSE:LVLT), Limelight (NASDAQ:LLNW), Edgecast, Amazon (NASDAQ: AMZN), etc., which has heightened CDN pricing pressure in recent years. Adding to Akamai’s troubles is the fact that important customers such as Apple are building their own content delivery networks. Apple is reported to have delivered updates to its operating system through its own content delivery network in 2014. ^[2] Nonetheless, the company is still using Akamai’s services and we believe that any shift to an internal content delivery network will be a phased and prolonged project.

However, in an adverse scenario, Apple could develop its delivery network on an accelerated schedule. There is also a possibility that this trend might catch on and other high-profile customers might decide to follow in Apple’s footsteps. Companies such as Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG) were able to develop their networks at a fast clip. Amazon went one step ahead and started offering CDN services to other companies, effectively becoming a competitor to Akamai. Apple is an important client for Akamai and contributes in excess of $100 million towards Akamai’s yearly revenues. ^[3] The loss of customers such as Apple will lead to a decline in Akamai’s average revenue per subscriber and the figure could come down to $900,000 by 2021 instead of our base case projection of $1.04 million. The decline in average revenue per subscriber would in turn bring down Akamai’s price estimate to $62.90, which would be a 10% correction to our current price estimate of $70.

Akamai’s Value-Added Services Growing At A Faster Rate (~10% Upside)

Akamai has been bolstering its performance by improving its value added services through collaborations, new launches and acquisitions. Akamai has acquired companies such as Xerocole, Prolexic, Verivue and Blaze in the past. This has helped the company in mitigating the impact of pure-play CDN commoditization and grabbing a bigger share of customers. 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 by offering multiple value added services such as the delivery of targeted advertising, cloud-based services and security solutions to its customers. Value-added services now account for around 46% of Akamai’s overall revenues and have higher gross margins compared to basic content delivery. ^[4] Accordingly, we believe that value-added services will continue to grow and will be instrumental in increasing Akamai’s overall revenues from less than $2 billion in 2014 to $3.8 billion by 2021.

Among the various value-added solutions that Akamai sells, security products are experiencing the fastest growth and grew by 29% last year. Demand for security products has been partly spurred by high-profile data breaches such as those at Sony Corp and Home Depot. ^[5] A recent report by Forrester Research predicts that at least 60 percent of enterprises will encounter a breach of sensitive data in 2015. ^[6] Akamai observed a record number of DDoS attacks over its Prolexic network in Q1 2015, a 116.5% increase over the year ago period. ^[7] The company has also warned of an uptick in DDoS reflection attacks in the coming quarters. ^[8] Akamai senses an opportunity in the current scenario and is enhancing its capabilities in order to better serve clients. (Related – Akamai Takes Strategic Steps With Focus On Security Solutions Business) Akamai’s growing niche in the security solutions market could enable the company to wield more pricing power in the coming years. The additional revenue brought in by higher priced security products will push Akamai’s average revenue per subscriber higher. In our base assumption, we believe that average revenue per Akamai media customer will be around $730,000 in 2015 and will eventually grow to $1.04 million by 2021. This figure increases to $770,000 for 2015 and reaches $1.2 million in the next six to seven years in our optimistic scenario, which factors in the additional pricing power. Consequently, the additional growth in security and value-added services could result in a potential upside of around 10% to our price estimate.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Facts & Figures, Akamai [↩]
2. Apple’s iOS 8 included one more surprise, Deepfield [↩]
3. Apple Building Out Their Own CDN To Deliver Content To Consumers, February 3, 2014, StreamingMediaBlog.com [↩]
4. Akamai’s SEC filings [↩]
5. 32 Data Breaches Larger Than Sony’s in the Past Year, March 10, 2015, Huffington Post [↩]
6. Planning For Failure, February 11, 2015, Forrester [↩]
7. Akamai’s State of the Internet Report Q1 2015 – Secutity, Akamai [↩]
8. Akamai Warns Of An Uptick In DDoS Reflection Attacks Using Abandoned Routing Protocol, July 01, 2015, Akamai Press release [↩]