Despite 40% Rise This Year Is Akamai Stock A Better Pick Than VeriSign?

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Given its better prospects, we believe Akamai stock (NASDAQ: AKAM) is a better pick than its industry peer, Verisign stock (NASDAQ: VRSN). Investors have assigned a higher valuation multiple of 15x revenues for VeriSign compared to 4.7x revenues for Akamai due to VeriSign’s superior profitability and solid financial position, as discussed below. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. In the sections below, we discuss why we believe AKAM will offer better returns than VRSN in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Verisign vs. AkamaiWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

VRSN stock has seen little change, moving slightly from levels of $215 in early January 2021 to around $220 now, while AKAM stock has witnessed gains of 15% from levels of $105 to around $120 over the same period. This compares with an increase of about 25% for the S&P 500 over this roughly three-year period.

Overall, the performance of VRSN stock with respect to the index has been lackluster. Returns for the stock were 17% in 2021, -19% in 2022, and 7% in 2023 (YTD). Similarly, the increase in AKAM stock has been far from consistent, with returns of 11% in 2021, -28% in 2022, and 39% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 23% in 2023 (YTD) – indicating that VRSN underperformed the S&P in 2021 and 2023 and AKAM underperformed the S&P in 2021 and 2022.

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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 VRSN and AKAM face a similar situation as they did in 2021 and underperform the S&P over the next 12 months – or will they see a strong jump? We believe that both stocks will see higher levels but AKAM will likely fare better than VRSN.

1. Akamai’s Revenue Growth Is Better

  • Akamai’s top-line expansion has fared slightly better, with its revenue rising at a 7.7% average annual rate in the last three years compared to 5.0% for VeriSign.
  • Verisign’s revenues rose from $1.2 billion in 2019 to $1.4 billion in 2022, driven by higher demand for domain names.
  • The company benefited from increased demand for domain names during the pandemic as more businesses expanded their presence online.
  • Price increases have also bolstered the company’s top-line growth, and this trend is expected to continue in the near term.
  • Akamai’s security and compute businesses has been the key growth driver in the recent past.
  • The company is also benefiting from its acquisition of Infrastructure as a Service (IaaS) provider Linode – in February 2022.
  • Looking at the last twelve-month period, VeriSign’s 6.5% top-line growth fares better than 2.5% for Akamai.
  • Our Verisign Revenue Comparison and Akamai Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, we forecast VeriSign’s sales to rise slightly from $1.5 billion in the last twelve months to $1.6 billion in the next three years. We expect Akamai’s sales growth to fare better with its top-line expanding from $3.7 billion to $4.3 billion over the same period.

2. Verisign Is More Profitable 

  • Verisign’s operating margin decreased slightly from 69% in 2019 to 67% in 2022, while Akamai’s operating margin rose marginally from 19.0% to 19.1% over this period.
  • Looking at the last twelve-month period, Verisign’s operating margin of 68.8% fares far better than 16.9% for Akamai.
  • Our Verisign Operating Income Comparison and Akamai Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Verisign fares much better. Its 8% debt as a percentage of equity is lower than 13% for Akamai, while its 56% cash as a percentage of assets is higher than 12% for the latter, implying that Verisign has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Akamai has seen superior revenue growth, while VeriSign is far more profitable, and has a better financial position.
  • However, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Akamai is the better choice of the two.
  • 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.
  • However, if we compare the current valuation multiples to the historical averages, VRSN fares better. VRSN is trading at 15x revenues vs. the last five-year average of 17x. In contrast, AKAM stock trades at 4.7x revenues vs. the last five-year average of 4.6x.
  • Our Verisign (VRSN) Valuation Ratios Comparison and Akamai (AKAM) Valuation Ratios Comparison dashboards have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 14% for AKAM over this period vs. an 8% expected return for VRSN, based on Trefis Machine Learning analysis – Verisign vs. Akamai – which also provides more details on how we arrive at these numbers.

While AKAM may outperform VRSN in the next three years, it is helpful to see how Verisign’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Dec 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 VRSN Return 4% 7% 189%
 AKAM Return 2% 39% 76%
 S&P 500 Return 3% 23% 110%
 Trefis Reinforced Value Portfolio 4% 33% 584%

[1] Month-to-date and year-to-date as of 12/13/2023
[2] Cumulative total returns since the end of 2016

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