Akamai Stock Has Seen Little Change Since 2021. Will A Q3 Earnings Beat Drive The Stock Higher?

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Akamai

Akamai (NASDAQ:AKAM) is slated to report its Q3 FY’23 results on November 7. We estimate that Akamai’s revenue will come in at about $944 million for the quarter, slightly ahead of consensus estimates and about 8% higher compared to last year. We estimate that earnings will stand at close to $1.50 per share, in line with the consensus. So what are some of the trends that are likely to drive Akamai’s results? See our dashboard analysis on Akamai Earnings Preview for more details on how Akamai’s revenues and earnings are likely to trend for the quarter.

Amidst the current financial backdrop, AKAM stock has seen little change, moving slightly from levels of $105 in early January 2021 to around $100 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. Overall, the performance of AKAM stock with respect to the index has been lackluster. Returns for the stock were 11% in 2021, -28% in 2022, and 21% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 8% in 2023 (YTD) – indicating that AKAM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AKAM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong recovery?

We expect Akamai’s security and compute businesses to remain a key driver of its business over the third quarter, largely helping to offset declines in the delivery business. For perspective, the security segment grew by about 14% year-over-year during the last quarter, while delivery sales fell by almost 9%.  We will be closely watching Akamai’s progress in the computing space, which the company has increased exposure to following its acquisition of Infrastructure as a Service (IaaS) provider Linode in February 2022.  Earlier this year, the company unveiled the Akamai Connected Cloud, putting it in direct competition with deep-pocketed hyper scalers such as Amazon AWS, Microsoft Azure, and Google. Over Q2 compute revenue rose by 16% year-over-year to $123 million.

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We remain bullish on Akamai stock for a couple of reasons.  Akamai’s valuation is quite reasonable. The company has guided for non-GAAP earnings of between $5.87 to $5.95 per share for this year, translating into a forward earnings multiple of roughly 17x. Akamai could see a meaningful upside if it executes well in the computing market – which is sizeable and lucrative. The company could have some advantages, given its large network of around 350,000 edge servers across 4,100 locations, which are located away from metropolitan centers, giving the company considerable geographic scale. Our $106 price estimate for AKAM stock is slightly ahead of the current market price. See our analysis on Akamai Valuation: Is AKAM Stock Expensive Or Cheap? for more details on what’s driving the company’s valuation and how it compares with peers.

 Returns Oct 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 AKAM Return -4% 21% 53%
 S&P 500 Return -4% 8% 85%
 Trefis Reinforced Value Portfolio -6% 16% 496%

[1] Month-to-date and year-to-date as of 10/28/2023
[2] Cumulative total returns since the end of 2016

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