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Investment Overview for Akamai (NASDAQ:AKAM)
WHAT HAS CHANGED?
- Threat of clients shifting to internal content delivery networks
Akamai stated on a recent earnings call that the company believes that the media content delivery business, coming in from some of its biggest clients, will decrease in the near future. This seems to be the after-effect of important customers such as Apple diverting traffic to their own content delivery networks. There is a possibility that these big clients could divert all of their traffic to their internal delivery networks on an accelerated schedule. Companies such as Netflix and Google were able to develop sustainable networks at a fast clip. Amazon went one step ahead and started offering CDN services to other companies, effectively becoming a competitor to Akamai. Nonetheless, companies such as Apple are still using Akamai’s services, and we believe that fully shifting to an internal content delivery network will be a phased and prolonged project. Additionally, there are fears that this “do-it-yourself” 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 smaller Akamai clients. All this leads us to believe that even though loss of business from some of its biggest clients will eat into Akamai’s future revenue growth, the company is not at immediate risk of losing a major portion of its revenue stream. In fact, during the second quarter of 2016, Akamai's revenue from its top 6 technology clients fell to 11% from 18% in the year ago period.
Below are key drivers of Akamai's value that present opportunities for upside or downside to the current Trefis price estimate for Akamai.
Online Shopping Content Delivery
Revenue Per Akamai Online Shopping Customer: We estimate that this figure will increase from about $300,000 in 2015, to about $410,000 by the end of our forecast period. However, there could be a potential upside of more than 5% to our price estimate, if this figure was to reach past $500,000. On the other hand, there could be a downside of about 5% if this figure only reaches about $350,000 by end of our forecast period.
Number of Akamai Online Shopping Business Customers: We estimate that this figure will increase from about 2,700 in 2015, to around 3,500 by end of our forecast period. However there could be a potential upside of more than 5% to our price estimate if Akamai can increase its online shopping customer base to 4,000 by the end of our forecast period.
Media Content Delivery
Revenue Per Akamai Media Business Customer: We estimate that this figure will increase from about $720,000 in 2015, to around $1 million by the end of our forecast period. However, there could be a potential upside of more than 10% to our price estimate if this figure were to reach $1.4 million by the end of our forecast period. On the other hand, there could be a downside of 10% if this figure remains around $700,000 by the end of our forecast period.
Number of Akamai Media Business Customers: We estimate that this figure will increase from about 1,350 in 2015 to 1,630 by the end of our forecast period. However, there could be a potential upside of about 10% to our price estimate, if Akamai can increase its media customer base to about 2,150 by the end of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Akamai at the top of the page.
Akamai operates a worldwide network of over 200,000 servers, that help Akamai's customers deliver Internet content faster to their end users. The company estimates that it delivers 15-30% of the global web traffic. Websites like Apple, Yahoo!, NBC, ESPN, the NBA, and Verizon Wireless, use Akamai for content delivery, which means that some of the content you view when visiting these sites is delivered from a nearby Akamai server, rather than the company's own servers.
We believe Online Shopping Content Delivery and Media Content Delivery, are the most valuable segments within Akamai for the following reasons:
Large Number of High-Margin Online Shopping Customers
Although the revenue per customer for media content customers is higher than that of online shopping customers, we estimate that Akamai had close to 2,700 online shopping customers by the end of 2015, which is about double as many as for its media content delivery business. Moreover, the margins for this business are higher than media, due to the comparatively low bandwidth requirements for online shopping as compared to watching videos, et al.
Value-added services, such as transaction security, is an important part of delivering content for online shopping sites. Akamai provides transaction security for commerce sites, such as Best Buy, Microsoft, and Travelocity.com. These services help Akamai retain customers in the commerce and financial services space.
Apart from security, other value added services, like advertising decisions, dynamic site acceleration services, etc., have helped Akamai in winning and retaining a large number of online shopping customers. Around 50% of Akamai's revenues can be attributed to such services.
High Growth and High Revenue for Media Content
The delivery of media content, such as images and video, is a huge growth area for Akamai and other content delivery networks. Akamai helps customers like ESPN, Apple, and Yahoo! deliver data-intensive media content faster to internet users. The worldwide demand for Internet media is expected to increase significantly due to rising broadband penetration and growing prevalence of HD video, such as Youtube, Netflix, and Hulu.
We estimate that Akamai earned ~$720,000 per media content customer in 2014, compared to ~$300,000 per online shopping content customer. Content delivery pricing is largely a function of the amount of data that is delivered, and media customers generally have much higher bandwidth requirements than online shopping customers.
Focus on Value Added Services
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 -- touting its ability to offer multiple value-added services, such as the delivery of targeted advertising and cloud-based services, for its customers. Value-added services now account for around 50% of Akamai's overall revenues, and have higher gross margins compared to basic content delivery.
Its acquisition of Prolexic Technologies has helped it bolster its security solutions portfolio and reduce competition in this area. Such acquisitions will help Akamai protect its margins as competition intensifies in its core content delivery business.
Media Content Rising - Margin Pressure
Media content is rising at a significant pace as a greater amount of video moves online and video quality increases (for example HD video). Some of the services that are stimulating this trend are Netflix, Hulu, and Youtube. Although growing media demand is an opportunity, it is also a source of gross margin pressure, since one of Akamai's largest costs is the cost of bandwidth to deliver data. Akamai passes on some of these costs to customers in the form of a bandwidth usage-based pricing structure; however, Akamai's pricing will be under pressure from volume discounts and competition from other content delivery networks.
Akamai Getting Competitive on Pricing
Akamai has historically charged premium prices to its customers for fast and secure delivery of their web content. However, the company is increasingly competitive on pricing, particularly on video content, in an effort to attract more customers and traffic to its network. In several deals, it has even outbid its competitors on price. This is likely to win more customers for Akamai, but may put pressure on margins.
Growth in Mobile Web Traffic - Both Risk and Opportunity
The company is also taking steps to move into mobile networks. Mobile traffic growth is both a result of stimulation of higher internet usage, as well as the shift of some traffic from wireline to wireless networks. This shift of data usage could pose a risk for Akamai’s wireline CDN business if it does not quickly capitalize on mobile web growth.
However, some of Akamai's decisions show that it has started to take mobile data growth seriously. Some of the steps the company has taken in this direction include the acquisition of Velocitude and its partnership with Ericsson. The Cotendo acquisition gave Akamai an existing mobile acceleration suite, that helped it further its interests in this domain.
Trefis Forecast Rationale for Revenue per Akamai Online Shopping Business Customer
Represents the average revenue from each Akamai online shopping customer. Examples of online shopping customers include retailers like Amazon, eBay, Nordstrom, Footlocker and consumer focused companies like Cathay Pacific, Audi, Best Buy, BMW
Akamai has only provided detailed customer vertical-specific average revenue per customer in 2008, after which we have used our own estimates based on color provided by the management. We estimate that this figure has increased from about $150,000 in 2008 to more than $300,000 in 2015.
We expect the average revenue per customer within the Commerce vertical to continue to grow.
Trefis considered the following factors for its forecast:
Back to Company Overview
- Increasing Internet and broadband penetration
- Internet penetration currently stands at around 85% in the US with around 90% of those users having a broadband connection. We expect the internet penetration to reach nearly 100% by the end of the forecast period.
Sustained growth in e-commerce
- Online retail purchases in the U.S. topped $200 billion for the first time in 2011 and have grown to around $300 billion by 2014. This was still only 7% of the overall retail market. We expect online sales to maintain healthy growth rates over the coming years due to:
Advancements in online security which have made transactions over the Internet more secure through the use of encryption technologies
Increasing broadband penetration, driven by lower broadband costs among other things
Lower costs of having an online presence, which will provide big opportunities for Small and Medium Enterprises (SMEs)
From a demographic perspective, online retail is especially popular with teenagers. As they mature and begin careers, their spending power will grow; and overall ecommerce sales will increase globally.
- Continued brick-and-mortar expansion into online venues
- Internationally as well, the online proportion of sales for above mentioned categories is likely to grow. International markets account for around 30% of Akamai's overall sales in recent quarters.
Growth in value added services is boosting revenue per customer
- Apart from delivering the web content, Akamai also offers value added services for its clients. These include advertising solutions, dynamic site acceleration (DSA) solutions, security solutions, and application performance improvement.
- These services have grown to account for around 50% of overall revenues every quarter.
- The acquisition of Prolexic Technologies has helped Akamai bolster its security offerings and increase its average revenue per customer as well.
- Akamai’s distributed platform affords it massive speed, reliability, scalability, and cost advantages:
- Akamai has over 200,000 servers globally which enable Akamai's infrastructure to be within the last mile, no matter where a customer's end user is. This difference in Akamai's approach over the centralized data center approach taken by many of Akamai's competitors is what differentiates Akamai from them, and affords it significant advantages in terms of driving better speed, scalability, reliability, and lower cost.
- Specifically for the commerce space, Akamai's algorithms avoid trouble spots in the Internet and route traffic more efficiently, which leads to a reduction in page load times, resulting in better customer experience and limiting abandoned transactions.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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