Akamai’s Fair Value Close to $31 if Acquired
Akamai’s (NASDAQ:AKAM) stock has been volatile over the last few weeks, and in the last two days of trading session it has gained by about 20% on the speculation that Akamai could be an acquisition target for companies like IBM (NYSE:IBM) or Verizon (NYSE:VZ). [1] If we look at Akamai’s stock year to date performance, the stock has declined by around 60% from the highs of $50 at the beginning of the year to $22 as of today.
The fall has been dramatic even if we consider that Akamai continues to face pricing pressures from competitors like Limelight Networks (NASDAQ:LLNW), InterNAP Network Services (NASDAQ:INAP) and Level 3 (NASDAQ:LVLT) for its content delivery network (CDN) service. This dramatic fall makes Akamai a great acquisition target for other companies. We believe that the sell-off has been overdone and our $31 price estimate for Akamai stock is about 40% above market price.
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See our complete analysis for Akamai stock here
Why the stock have had such a dramatic decline?
During the last few earnings release, Akamai has continued to revise its revenue outlook lower. During Q2 2011 earnings release, Akamai announced that it expects the revenue growth for 2011 to be between 10-13% compared to the previous expectation of 15% growth (see Akamai’s Stock Crashes on Weak Outlook, Sell Off Overdone). It is a fact that Akamai has started to face pricing pressure from its competitors, and as a result, has renewed some of its content delivery contracts at lower price points.
On the positive side, the revenue contribution from value-added services such as advertising solutions, dynamic site solutions and application performance improvement has helped mitigate the effects of lower content delivery network (CDN) pricing. A lot will depend on whether Akamai can continue to market its value-added services to its customers the way it has so far. Competition is emerging and telecoms like AT&T (NYSE:T) are pushing into CDN business and offering more value-added services.
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Notes:- Akamai Down 57% Lets IBM Vie With Verizon for Takeover: Real M&A, Bloomberg, October 6th, 2011 [↩]