Akamai Stock To Surge To New Highs?

by Trefis Team
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Despite more than a 20% rise since the March lows of this year, at the current price of around $97 per share, we believe Akamai stock (NASDAQ: AKAM) is still a good opportunity for investors. Akamai stock has increased from $80 to $97 off the recent bottom, less than the S&P which increased by 50% from its lows. Further, the stock is down around 5% from its 2020 pre-Covid high of $103. We believe that Akamai’s stock could set fresh highs, rising almost 25% from its current level, driven by expectations of rising demand and strong Q3 2020 results despite the pandemic. Our dashboard Buy Or Sell Akamai Stock? has the underlying numbers behind our thinking.

The stock price rise since 2018-end came due to a 7% rise in revenue from $2.71 billion in 2018 to $2.89 billion in 2019. This translated into a 60% jump in net income, primarily due to a rise in operating margins (19% in 2019 vs 13.35% in 2018) and a drop in the effective tax rate (10% in 2019 vs 13% in 2018). EPS in turn rose from $1.78 in 2018 to $2.94 in 2019.

Akamai’s P/E multiple dropped from 34x in 2018 to 29x by 2019 end, but has since risen to 33x. We believe that the company’s P/E ratio has the potential to see a further increase in the near term on expectations of continuing demand growth and favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 has seen a surge in new online blogs and websites and has also led to a lot of businesses shifting online. Akamai is in the web server business, and with more and more websites needing server space, Akamai’s business has actually been helped by the pandemic. The company posted Q3 2020 revenue of $793 million, up 12% from $710 million for the same period last year. EPS, too, rose from $0.85 to $0.97 over the same period, and we believe that demand for website server space will stay strong, and Akamai will see further revenue growth in the near to medium term, causing net income to rise even further.

We expect this to drive up the company’s P/E multiple, and believe that Akamai’s stock can rise around 25% from current levels, to cross its 2020 high of $119.

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