Why We Believe Akamai’s Average Revenue per Media Customer Could Cross $1 Million By 2022

Media content delivery remains one of Akamai‘s (NASDAQ:AKAM) biggest value contributor. We expect the company to grow its media customer base as well as revenue per media customer (which is a mix of content delivery and value-added solutions) significantly over the next six to seven years. In this analysis, we’ll look at factors driving growth in revenue per customer. The figure stood at an estimated $669,000 in 2014 and we expect it to cross $1 million by the end of our forecast period. This growth will be driven by the secular trends of more business being conducted online, increased online content and traffic, and increased demand for faster and more secure content delivery. Strong growth in Akamai’s value-added (VAS) services, such as security solutions and app accelerators, will also contribute to the increase in revenue per customer. Ultimately, strong growth in Akamai’s revenue per media customer will be instrumental in increasing the company’s overall revenues from less than $2 billion in 2014 to $3.9 billion by 2022. There can be almost 15% upside to our price estimate if Akamai can increase its revenue per media customer to $1.5 million in the next six to seven years. That scenario may not be unlikely, considering the recent demand for security solutions, site acceleration and the dramatic increase in video data.

Our price estimate for Akamai stands at $72, which is roughly in line with the market price.

See our complete analysis for Akamai here

Increasing Internet Usage Driven By Video Consumption

Consumers are spending a great deal of their time on the Internet and the big media companies are taking steps to move their content offerings online. For instance, online streaming giant Netflix (NASDAQ:NFLX) finished Q2 2015 with 42.3 million subscribers in the U.S., accounting for more than one-third of the country’s households. ^[1] We believe the streaming company will cross 60 million subscribers by the end of 2020. Amazon (NASDAQ:AMZN) has experienced great success with its Prime service which, besides offering free shipping, allows subscribers to stream TV shows and movies. Hulu, a company jointly owned by NBC, Fox Broadcasting Company and Disney (NYSE:DIS), allows users to access content from computers, smartphones, game consoles, tablets, set-top boxes, etc., and hit 9 million subscribers this year. ^[2] In addition, companies such as Sony, Dish Network (NASDAQ:DISH) as well as individual premium networks such as HBO and CBS (NYSE:CBS) have launched their own streaming services. The changing landscape of media consumption will drive significant growth in data usage in the coming years. Such a transition will drive a very high degree of growth for content delivery network providers such as Akamai. Aiding such a transition is the growth in Internet users and broadband penetration. The number of Internet users worldwide has more than tripled from the 2005 levels of around 1.04 billion to more than 3.2 billion as of 2015. ^{[3] [4]} The proliferation of mobile devices has contributed hugely to this growth as users have increasingly begun to access the Internet on the move.

Growing Broadband Speeds Call For Greater Bandwidth

Akamai’s Q1 2015 ‘State of the Internet’ report states that global average broadband connection speeds grew by 30% last year, and crossed the threshold of 5 Mbps for the first time. ^[5] Additionally, there are several countries which have a high percentage of broadband connections with speeds of over 15 Mbps, which is considered as a minimal threshold for 4K (ultra HD) transmission. User demand for high quality content in 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 same standard, mobile data usage is also set to surge.

Akamai Is Combating Pricing Pressure With Its Value-Added Services Portfolio

Pure-play CDN is rapidly becoming commoditized, with increasing competition from rivals such as Level 3, Limelight Networks, Edgecast, and more recently, Amazon. This has heightened CDN pricing pressure in recent years. However, Akamai has been bolstering its performance and security value-added solutions through new service launches and acquisitions. This will help the company mitigate the impact of Pure-play CDN commoditization and will help it grab a bigger share of the market. These services, which have higher margins than content delivery, have grown to account for more than 45% of Akamai’s revenues in recent years. ^[6] Among the various value-added solutions that Akamai sells, security products are experiencing the fastest growth. Akamai’s margins have also benefited from investment in its network, which have lowered bandwidth and co-location costs as well as increased efficiency in content delivery.

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1. Q2 15 Letter to shareholders, July 15, 2015, Netflix Investor Relations [↩]
2. Hulu hits 9 million subscribers as TV and mobile viewing takes off, April 29, 2015, The Verge [↩]
3. Internet used by 3.2 billion people in 2015, 26 May, 2015, BBC News [↩]
4. List of countries by number of Internet users, Wikipedia [↩]
5. Akamai’s state of the internet Q1 2015, Akamai [↩]
6. Akamai’s SEC Filings [↩]