Why We Love Akamai Stock

  • Akamai’s revenue continues to grow at a healthy pace with improving profitability
  • Akamai’s business model ties its prospects to the inevitable growth of the internet
  • Akamai’s stock looks attractive at a Price/Equity multiple of 35

Why Akamai is among our top picks

The leading provider of cloud services for online content delivery and security, Akamai Technologies  (NASDAQ:AKAM) makes it to our list of favorite stocks and scores a stock rating of 4/5. We love the company for its ability to relentlessly deliver steady revenue growth and healthy profitability.

Akamai Overall Revenue and Revenue by segment

Akamai’s revenue grew at 15% in FY 2013 over FY 2012 (Y/Y growth) to cross the $1.5 billion mark. The company beat its own guidance for the quarter which was higher than consensus estimates. Akamai has beaten estimates in 6 out 8 preceding quarters, a reflection of its ability to outperform consistently.

In FY 2013, Akamai’s growth rates slowed to 15% from its FY 2012 average of 19%. However, its revenue has continued to grow in absolute terms, adding more incremental revenue in the year than it did a year ago. As is evident from the graph, Akamai’s revenue growth has been consistent and steady.

Akamai Revenue and Profitability Trend

In Q4 2013, Akamai saw growth across revenue streams:

  • Media Delivery Solutions - grew 19% Y/Y  to account for 48% of revenue
  • Performance & Security Solutions - grew 18% Y/Y to account for 44% of revenue
  • Service & Support Solutions - grew 36% Y/Y to account for 8% of revenue

FY 2013 saw the company invest in its ‘Performance & Security’ business, adding sales capacity and new products/features to the segment which now has 800 customers. The segment is expected to get a further boost in the quarters post Q1 2014, with Akamai’s acquisition of cloud based security services provider, Prolexic Technologies.

Over the last 3 years, the ‘Performance & Security’ and ‘Service & Support’ segments have grown at a faster pace to increase their share in the company’s revenue.

Akamai Profitability and Cash Flows

In Q4 2013, the company’s Earnings Per Share (EPS) of $0.55 also beat estimates in keeping with its trend over the last 8 quarters. Akamai ended FY 2013 with its highest operating and net profit margins over the last 3 years following a drop in FY 2012. This, in spite of the fact that a 7% expansion in gross margins was negated by faster than expected hiring of sale force.

Akamai Revenue and Profit Margin Trend

The company’s focus on, and success in optimizing the efficiency of their servers could translate to higher gross margins. The company expects to see gross margins at about 68% going forward.

Akamai ended FY 2013 with $673 million worth of cash and cash equivalents and generated healthy operating cash flows of $564 million, close to twice its net profits and 35% of its revenue in FY 2013.

Future Guidance and Outlook

Akamai’s Q1 2014 revenue guidance of $426 - $442 million is in line with its past performance despite price renegotiation with one of its largest media customers. This is a healthy sign considering that the pricing cut should ideally have dragged revenue growth.

Earlier in the year, Akamai delivered one of the most viewed online live streams in the form of the Super Bowl. Further, it provided streaming and security services for NBC’s comprehensive online coverage of the Winter Olympics in Sochi, the first edition of the Olympics in which all events were streamed live.

Telefonica’s recent global alliance with Akamai to deliver its suite of content delivery networks (CDN) solutions is another opportunity to watch out for.

Akamai’s prospects are tied to the inevitable growth of the internet. An increasingly digital world that consumes more terabytes of data each passing day should serve as a tailwind for Akamai.

Akamai Valuation

Akamai currently trades at a Price/Earnings (P/E) multiple of 35.2 even after its stock price has grown at an attractive 5 year compounded annual growth rate (CAGR) of over 26%. Though its current P/E is at the higher end of its 2 year historical P/E band, the stock price has grown significantly in the same period at more or less the same P/E, implying that earnings have kept pace with price movement.

With a return on equity (ROE) of close to 12%, steady growth and increasing profitability, Akamai is a very attractive long term investment.

Akamai has been part of our top internet stock picks since 15 November 2013, and has returned over 26% in the 4.5 month period since.

To see Akamai’s latest stock price movement, click here (NASDAQ:AKAM)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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