How Much Can Cloud Growth Expand Akamai’s Valuation Multiples?

by Trefis Team
+15.26%
Upside
64.24
Market
74.04
Trefis
AKAM
Akamai
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Akamai Technologies (NASDAQ: AKAM) is a leading player in the web application firewall space, a market that is expected to grow at a CAGR of over 18%. However, consensus estimates call for Akamai’s revenue growth over the next two years to be well below the market growth rate, largely due to its diversified business and increasing market competition. While the company guides for 7-8% revenue growth for fiscal 2018, Akamai’s Cloud Security business has been growing well of late (+33% y-o-y in the second quarter of 2018), accounting for nearly 25% of total revenues. Given the pace of migration to the cloud and the company’s strong technology, there appears to be some upside to Akamai’s stock.

We currently have a price estimate of $75 per share for Akamai Technologies, which is higher than its market price. View our interactive dashboard – Akamai Technologies’ Price Estimate – and modify the key drivers to visualize the impact on its valuation.

One factor that has likely weighed on the company’s valuation was some key customers (such as Amazon and Netflix) deploying their own content delivery networks. However, the recent win of the Fortnite account was a testament to Akamai’s technological edge. Fortnite’s decision to migrate to Akamai reaped dividends for the gaming behemoth, with Akamai’s infrastructure enabling a 5x reduction in error rates.

Akamai also appears to be broadening its focus to include blockchain, the Internet of Things (IoT) and other emerging technologies. While investors appear to be recognizing this of late (as the stock price has appreciated by almost 40% in the last 12 months) there may be scope for further upside. The price appreciation is predicated on Akamai’s discount on an enterprise value (EV) to sales basis relative to cloud peers. That said, we also acknowledge Akamai’s slower revenue growth compared to the 20%+ growth rates of many cloud peers. Thus, in order to account for the comparatively slower growth, we ascribe a 50% discount to the cloud peer EV/revenue multiple of 9.2x. This implies a price estimate of $74, a potential upside of around 15% to the current market price.

Do not agree with our forecast? Create your own price forecast for Akamai Technologies by changing the base inputs (blue dots) on our interactive dashboard.

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