- Online video consumption, E-commerce and demand for internet security will continue to grow over the next few years.
- The major revenue segments at Akamai, Media delivery solutions and Performance & security solutions will be direct beneficiaries.
- The strong growth potential, good profit margins and reasonable valuations make Akamai stock an attractive option for the long term.
E-commerce and video have been the buzzwords in the world of internet over the last few years. The latest wave of internet frenzy has driven firms like Amazon and Alibaba to valuations in the 100’s of billions of dollars, even as Facebook, Google, Yahoo and every other major tech company has been trying hard to get a larger piece of the online video pie. In the meantime, video on-demand services like that of Netflix, Hulu and Amazon instant video have hastened the redundancy of cable companies in the developed world. The trends are clear: e-commerce is on the rise as and video is the future in a fast paced world, where time becomes a highly valued commodity. As the world moves from offline to online, the result has been an ever increasing demand for security.
Akamai (NASDAQ:AKAM), operating one of the largest content delivery networks and provider of cloud security solutions, has been a key beneficiary of the broader trends in the internet world. In our recent Akamai earnings preview for Q4 2014, we had highlighted the impact of these trends on Akamai’s upcoming earnings report. The strong growth in e-commerce online video consumption through Q4 2014 could carry the company over analyst estimates for the holiday quarter. However, a closer at key data points suggest Akamai will remain a growth stock over the long term.
E-commerce Growth To Continue Over The Long Term
As per Statista, Global e-commerce retail sales are expected to grow from $752 billion in 2014 to $1.35 trillion in 2018.
The Statista forecast implies a compounded annual growth rate of 15% from 2014 to 2018.
According to another post on Forbes, global B2B (business to business) online sales are expected to hit $6.7 trillion by 2020. On a comparative note, Forrester research reported global B2B online sales of $559 billion in 2013. The implied compounded annual growth rate (CAGR) is a whopping 43% over the 7 year period from 2013 to 2020.
Online Video Consumption To Grow Rapidly.
Online video consumption is also set to rise over the coming years. According to Cisco’s Visual networking index report, online video traffic will be 78% of global internet traffic in 2018, up from 66% in 2013.
A few interesting points from the report project a strong growth in the online video consumption through the years.
- It would take an individual over 5 million years to watch the amount of video that will cross global IP networks each month in2018. Every second, nearly a million minutes of video content will cross the network by2018.
- Globally, IP video traffic will be 79 percent of all consumer Internet traffic in 2018, up from66 percent in 2013. This percentage does not include video exchanged through peer-to-peer (P2P) file sharing. The sum of all forms of video (TV, video on demand [VoD], Internet, and P2P) will be in the range of80to 90 percent of global consumer traffic by 2018.
- Internet video to TV doubled in 2013. Internet video to TV will continue to grow at a rapid pace, increasing fourfold by 2018. Internet video to TV traffic will be 14 percent of consumer Internet video traffic by 2018, up from 11 percent in 2013.
- Consumer VoD traffic will double by 2018. The amount of VoD traffic by 2018 will be equivalent to 6 billion DVDs per month.
- Content delivery network traffic will deliver over half of all internet video traffic by 2018. By 2018, 67 percent of all Internet video traffic will cross content delivery networks, up from 53 percent in 2013.
Demand For Security On Internet Will Continue To Rise
Akamai’s state of the internet report for Q4 2014 highlights a trend of increasing attacks on the internet. The DDoS attacks registered a 57% YoY and significant increase in other metrics used to measure the strength and number of attacks. The report is summarized in the table below.
Akamai’s media delivery solutions and performance and security solutions, contributing 91% of Akamai revenue over the last twelve months, will be direct beneficiaries of the trends in e-commerce, online video consumption and security demand. The result will be long term broad based growth for Akamai.
Akamai Revenue Growth
Akamai’s two major reported segments, Media delivery solutions and Performance & security solutions have registered higher growth over the last few quarters.
The growth in the two major revenue segments can be expected to continue with favorable industry trends providing significant tailwinds to the company. The strong growth coupled with Akamai’s good profit margins shall provide long term earnings growth at Akamai. The revenue growth and earnings potential, in combination with reasonable valuations make Akamai an attractive investment for the long term. Our Akamai stock analysis assigns the stock a buy rating, reflecting our positive long term outlook on the Akamai stock.