Strong Earnings Can Help Akamai Stock Regain Recent Highs

AKAM: Akamai logo

Up only 20% from its low in March 2020, at the current price of $96 per share, we believe Akamai stock (NASDAQ: AKAM) has significant upside potential. Akamai stock has increased from $80 to $96 off the recent bottom, much less than the S&P which increased by around 70% from its lows. Further, the stock is down around 5% from the level it was at before the pandemic, and we believe that Akamai stock could regain its 2020 high of $125, rising over 25% from its current level around $96, driven by expectations of strong demand and strong full-year 2020 results despite the pandemic. Our dashboard What Factors Drove 57% Change In Akamai Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2018-end came due to a 11% jump in revenue from $2.9 billion in FY 2019 to $3.2 billion in FY 2020. Further, net margins rose from 16.5% to 17.4%, driving a 17% rise in EPS from $2.94 in FY 2019 to $3.43 in FY 2020, despite a roughly unchanged outstanding share count.

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Akamai’s P/E (price-to-earnings) multiple rose from 21x in 2018 to 25x by 2019 end, and has since further risen to 28x, riding the rally in technology stocks. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a 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. This is evident from Akamai’s full-year 2020 results, where revenue came in at $3.1 billion, up from $2.9 billion in 2019. The company managed to control operating expenses, which led to operating margins rising from 19% in 2019 to 20.6% in 2020. A marginally lower tax rate further helped Akamai’s profitability, with net income rising from $478 million to $557 million, driving EPS up to $3.43 from $2.94.

Despite the pandemic, we believe the company will continue seeing further revenue and margin growth in the medium term. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Akamai stock can rise more than 25% from current levels, to regain its recent high of $125.

While Akamai stock does seem attractive, 2020 has created many pricing discontinuities which can offer further  trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.


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