After A 30% Rally This Year, Akamai Stock Headed Down?

Akamai stock (NASDAQ: AKAM) is up 29% since the beginning of this year, and at the current price of around $112 per share, we believe Akamai stock has a significant downside.

Why is that? Our belief stems from the fact that Akamai stock remains about 72% higher than the low seen in early 2018. Our dashboard What Factors Drove 72% Change In Akamai Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Akamai is an internet company, involved in global content delivery through its extensive server and cloud network. Akamai’s stock rise over the past two years followed on from a 16% growth in revenue, which translated into a further 114% growth seen in net income. Net Income rose due to a jump in operating margins (19% in 2019 vs 12.6% in 2017) and a drop in the effective tax rate (10% in 2019 vs 29% in 2017). This, combined with a 5% drop in outstanding share count, led to a 126% growth in earnings on a per share basis.

Finally, Akamai’s P/E ratio dropped from 50x at the end of 2017 to 29x at the end of 2019. While its P/E has risen to 38x this year, given the volatility of the current situation, there is significant possible downside for Akamai’s multiple, especially when compared with previous years: 34x at the end of 2018, and 29x as recently as 2019.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus, and the resulting lockdowns and quarantine means that a lot of businesses are shifting online and there has also been an increase in new blogs and websites. However, a lot of existing companies are struggling and could be looking to cut web server costs, shifting to cheaper server providers. The mixed impact this could have on the company is still not clear, and we believe Akamai’s Q2 results later this week will paint a clearer picture.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E decline from the current level of 38x to around 32x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $90.

To find out how Akamai’s internet peer Verisign has performed over the same time period, view our interactive dashboard, What Factors Drove 83% Change In Verisign Stock Between 2017 And Now?.

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