Steady Demand Growth Could Push Akamai Stock To $125

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AKAM: Akamai logo
AKAM
Akamai

Up around 40% from its low in March 2020, at the current price of $111 per share, we believe Akamai stock (NASDAQ: AKAM) has further upside potential. Akamai stock has risen from $80 to $111 off its March 2020 bottom, much less than the S&P which increased by more than 80% from its lows. Further, the stock is up only around 10% from the level it was at before the pandemic, and we believe that Akamai stock could regain its early-2021 high of $125, rising almost 15% from its current level of $111, driven by expectations of strong demand and strong full-year 2020 results. Our dashboard What Factors Drove 83% 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 an 18% jump in revenue from $2.7 billion in FY 2018 to $3.2 billion in FY 2020. Further, net margins rose from 11% to 17.4%, driving a 93% jump in EPS from $1.78 in FY 2018 to $3.43 in FY 2020, despite only a 3% drop in the outstanding share count.

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Akamai’s P/E (price-to-earnings) multiple dropped from 34x in 2018 to 31x by 2020 end, but has since risen to almost 33x, 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 saw a surge in new online blogs and websites and also led to a lot of businesses shifting online. Akamai is in the web server business, and with more websites needing server space, Akamai’s business has, in fact, 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 slightly lower tax rate further bumped up Akamai’s profitability, with net income rising from $478 million to $557 million, driving EPS up to $3.43 from $2.94.

Despite economies opening up worldwide, we believe the company will continue seeing further revenue and margin growth in the medium term, as work from home becomes the new norm. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Akamai stock can rise almost 15% 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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