An analyst at Merriman Curhan Ford has recently recommended Akamai’s (NASDAQ:AKAM) stock, primarily as a result of the company’s increasing price competitiveness, expected high growth of internet traffic and Akamai’s value added services. We agree that Akamai’s value added services will be prime driver of growth for the company, particularly for its e-commerce business.
Akamai makes money by delivering web content for its customers (like ESPN.com) to internet users through its vast network of servers. The company’s distributed servers enable faster content delivery over the internet. By providing value added services, Akamai is increasing the revenue that it earns from each of its web customers.
Value Added Services Give Akamai a Significant Competitive Advantage
More than 50% of Akamai’s revenues can be attributed to value added services like advertising decisions, application performance, and dynamic site solutions. These are services that Akamai provides beyond simply delivering web content on behalf of a customer. Such services can help Akamai’s customers provide more targeted advertising to their web visitors and improve the security web transactions conducted through Akamai.
Furthermore, with the growth of cloud computing, Akamai is uniquely positioned to capture more business in the growing market for website security and application performance.
Value Added Services are Driving E-commerce (Online Shopping) Growth
Value added services are a prime driver of growth for Akamai’s online shopping content delivery business. We estimate that online shopping content delivery constitutes about 37% of the $22 Trefis price estimate for Akamai’s stock, making it the most important business segment for the company.
For Akamai, revenue per online shopping customer increased from about $150,000 in 2008 to $168,00 in 2009 with the majority of revenue growth being driven by value added services.
We expect this trend to continue and drive average revenue per online shopping customer to about $260,000 by end of our forecast period primarily due to following reasons:
- Increasing demand for website performance and security will drive growth of Akamai’s value added services
- Increasing consumer use of online shopping will drive up the amount Akamai’s customers spend on online shopping services
You can modify the forecast above and see the impact on Akamai’s stock if value added services were to increase revenue per customer higher than we forecast.
For additional analysis and forecasts, here is our complete model for Akamai’s stock