Akamai Technologies, Inc.: Why AKAM Stock Could Soar 30%

AKAM StockAkamai Technologies, Inc. (NASDAQ:AKAM) stock lost significant value due to concerns regarding its “Media Delivery Solutions” unit, as two of its largest customers decided to build their own content delivery network (CDN). The move means less revenue for the company, since those clients accounted around five percent of Akamai’s total revenue in the second quarter of 2016.

Some investors perceived the do-it-yourself (DIY) efforts of its two largest customers as a potential threat to Akamai stock’s long-term growth if it becomes a trend. As a result, AKAM stock declined from its highest trading price of $79.39 per share to its current trading price of $54.40 per share, down by $24.99, or more than 31%.

I believe that AKAM stock was negatively impacted by investors’ overreactions to the situation. However, it’s quite possible for Akamai stock to rebound in the coming quarters.

Akamai Is the Global Leader in CDN Services

Akamai is the global leader in CDN services and is trusted by one out of three Global 500 companies, top 30 media and entertainment companies, 20 leading global e-commerce web sites, 96 of the top-100 online U.S. retailers, more than 150 of the world’s leading news portals, all branches of the U.S. military, 16 of the top-20 global banks, and many others. (Source: “Facts and Figures,” Akamai Technologies, Inc., last accessed October 14, 2016.)

During the company’s second-quarter earnings call, Akamai CEO Frank Thomson Leighton addressed the concern regarding its Media Delivery Solutions unit, particularly the DIY efforts of its two largest CDN customers.

Leighton explained that it is expensive and impractical for the vast majority of its customers to build a CDN that is close to the scalability, quality, and security provided by Akamai. He emphasized that a large-scale DIY is only attempted by its biggest Internet platform customers.

He noted that some of the world’s biggest companies have tried to build their own CDN or had DIY CDNs, but they subsequently decided to turn to Akamai because of its superior quality and cost. Some of those corporations include AT&T Inc. (NYSE:T), China Telecom Corporation Limited (ADR) (NYSE:CHA), and Deutsche Telekom AG (ETR:DTE).

Leighton said he is confident that Akamai’s “risk of future revenue loss from DIY would only come from a few of the internet’s largest infrastructure and platform companies.” He also indicated that there is a possibility that some of the company’s principal Internet platform customers would continue to grow with Akamai.

Akamai’s Core Business Is Growing Vigorously

During AKAM stock’s earnings call, Leighton said investors’ near-term concern about the DIY efforts of its few largest CDN customers is understandable. He emphasized that the company’s core business is enormous and growing at a very healthy rate, and he expected its revenue to re-accelerate next year.

Akamai stock’s second-quarter revenue increased six percent to $572.0 million, and its adjusted earnings rose 12% to $0.64 per share. (Source: “Akamai Reports Second Quarter 2016 Financial Results,” Akamai Technologies, Inc., July 26, 2016.)

Akamai stock’s revenue from its “Performance & Security Solutions” segment climbed 16%,  its”Cloud Security Solutions” division surged 42%, and its “Services & Support Solutions” business went up 18% year-over-year. The robust performance of these businesses offset the weakness of its Media Delivery Solutions unit during the quarter.

Akamai Stock: A Consistent Market Outperformer

Akamai has been delivering solid financial results, which makes the company a consistent market outperformer. Over the past four quarters and the past four years, the company’s adjusted earnings and revenue either met or beat the consensus estimate of Wall Street analysts.

Akamai Technologies, Inc. Quarterly Financial Results
Quarter Earnings Per Share Revenue
Reported Consensus Reported Consensus
2Q16 $0.64 $0.64 $572.14 million $574.84 million
1Q16 $0.66 $0.63 $567.73 million $563.73 million
4Q15 $0.72 $0.62 $579.16 million $568.46 million
3Q15 $0.62 $0.58 $551.03 million $550.18 million

(Source: Akamai Technologies, Inc.)

Take note that the only time the company’s revenue was lower than expected was in the second quarter of 2016.  Akamai’s earnings and revenue growth rates over the past four quarters were 3.38% and 1.45% respectively.

Akamai Technologies, Inc. Annual Financial Results
Year Earnings Per Shares Revenue
Reported Consensus Reported Consensus
2015 $2.52 $2.42 $2.20 billion $2.19 billion
2014 $2.43 $2.41 $1.96 billion $1.95 billion
2013 $2.02 $1.99 $1.58 billion $1.57 billion
2012 $1.81 $1.77 $1.37 billion $1.38 billion

(Source: Akamai Technologies, Inc.)

Based on its annual financial performance, you will notice that Akamai managed to grow its profits and sales steadily. Its annual earnings growth rate was $13.67%, and its revenue growth rate was 17.45% over the previous four quarters.

Looking forward, analysts expected Akamai to achieve earnings of $2.56 per share on $2.32 billion for the full fiscal 2016.

The Bottom Line for AKAM Stock

Akamai is facing near-term challenges, but they are manageable. The company’s financial situation is rock-solid. Its total assets were $4.27 billion, much higher than its $1.12 billion total liabilities by the end of the second quarter. Its cash, cash equivalents, and marketable securities on hand were $1.6 billion.

Its free cash flow was $165.0 million, bringing its total to $273.0 million for the first half of 2016, more than double the total of its free cash flow recorded in the same period of 2015. The figures demonstrate that Akamai’s cash flow generation remained strong. The company is committed to returning more cash to shareholders through stock buybacks, given its healthy balance sheet and cash generation.

Wall Street analysts believe that Akamai stock will continue to outperform the market. They forecasted that AKAM stock could trade as much as $71.00 per share, an upside of 30% over the next 12 months. Their median price target is $61.00 per share, an increase of 12%.