Why We Think Akamai Is Valued Fairly

+6.65%
Upside
109
Market
116
Trefis
AKAM: Akamai logo
AKAM
Akamai

Akamai operates a worldwide Content Delivery Network (CDN) of over 200,000 servers, that help its customers deliver Internet content faster to their end users. The company has a huge customer base of media, technology, government and e-commerce clients, who have been consistently using its services. However, lately, the company has been at the receiving end of an industry-wide trend, where its customers are investing in their own content delivery networks. To this end, revenue from Akamai’s six biggest technology clients has declined considerably over the past couple of years, yet the company has managed to keep its revenues running by getting smaller clients on board. We believe that Akamai is valued fairly at $54 (our price estimate for the company is at $52) because despite the risk of losing big clients, the company’s focus on value added services should contiue to support growth, albeit at a slower pace.

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 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. The company has seen rapid growth in its nascent security business, which presents significant opportunities for the future.

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Media Content Rising Putting 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.

Competitive Pricing to Attract More Customers

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.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Akamai
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