Steady Earnings Growth Could Drive Akamai Stock To $125
Having risen more than 40% from its March 2020 low, at the current price of $113 per share, we believe Akamai stock (NASDAQ: AKAM) has further upside potential. Akamai stock has risen from $80 to $113 off its March 2020 low, far less than the S&P which has risen 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 January 2021 high of $125, rising more than 10% from its current level of $113, driven by expectations of steady demand growth and strong Q1 2021 results. Our dashboard What Factors Drove 85% 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% growth 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 strong 93% jump in EPS from $1.78 in FY 2018 to $3.43 in FY 2020, helped by 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 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 drove a surge in new online blogs and websites, with a lot of businesses shifting online. Akamai is a web server company, and with more websites needing server space, Akamai’s business has benefited from the pandemic. Despite the economy opening up, this trend has continued, leading to a steady rise in demand for Akamai’s servers. This is evident from Akamai’s Q1 2021 results, where revenue came in at $843 million, up from $764 million in Q1 2020. Akamai managed to control operating expenses, which led to operating margins rising from 19.9% in Q1 ’20 to 21.6% in Q1 ’21. A slightly lower tax rate further boosted Akamai’s profitability, with net income rising 25%, driving EPS up to $0.95 from $0.76.
We believe the company will continue seeing further revenue and margin growth in the medium term, as the work from home trend continues, and businesses continue building an online presence. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Akamai stock can rise around 10% from current levels, to regain its recent high of $125.
While Akamai stock may be undervalued, it is helpful to know how its peers stack up. Akamai Stock Comparison With Peers summarizes how Akamai compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.
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