Up 1.8x Since 2019, Akamai Stock Rally Coming To An End?

Akamai stock (NASDAQ: AKAM) is up around 27% since the beginning of this year, but at the current price of around $110 per share, we believe that Akamai stock could see significant downside.

Why is that? Our belief stems from the fact that Akamai stock has jumped 1.8x from the low seen at the end of 2018, around 1.5 years ago. Our dashboard What Factors Drove 80% Change In Akamai Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Akamai is an internet server company, that provides its clients with web servers so that their websites can be accessed globally. The stock rise over the past year and a half came due to a 7% growth in revenue, which combined with a 50% growth in net margins, led to a 60% jump in net income. Net income rose due to lower SG&A expenses, and a drop in the effective tax rate (13% in 2018 vs 10% in 2019). Combined with a 3% drop in the outstanding share count, this led to a 65% rise in earnings per share (EPS).

Further, Akamai’s P/E ratio dropped from 34x in 2018 to around 29x in 2019. While its P/E has risen to 37x currently, given the volatility of the current situation, there is significant possible downside risk for Akamai’s multiple, especially when compared with previous years: 34x in 2018, and 29x as recently as late 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. This is evident from Akamai’s Q2 results in August where revenue rose almost 13% to $795 million, from $705 million for the same period last year. Lower selling expenses and a drop in the effective tax rate from 15% to 10% meant that EPS jumped to $1.00 from $0.70. However, a lot of existing companies are struggling and could be looking to cut web server costs, shifting to cheaper server providers or shutting up shop altogether, due to the pandemic. The mixed impact this could have on the company should become more evident from Akamai’s Q3 results in October.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E multiple decline from the current level of 37.5x to around 34x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $95.

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