Akamai Technologies, Inc. (AKAM) is leveraged to several of the fastest growing trends in technology: Internet video, e-commerce, cloud computing, the Internet of Things and Internet security. The explosive growth of these trends should cause AKAM’s revenue and profits to rise at a fast pace, and Akamai stock should follow suit.
AKAM operates the leading Internet content delivery network, or CDN — a group of servers that speed up the delivery of online video and online media content.
Of course, online video and online media are growing at explosive rates. Retailers, media outlets, and other companies are posting more and more media and video on their websites all the time. Although the heaviest streamers of Internet video — i.e., Netflix, Inc. (NFLX), YouTube, and Amazon.com, Inc. (AMZN) — are not Akamai customers, some pretty heavy hitters do use AKAM, including Yahoo! Inc. (YHOO), Thomson Reuters Corporation (USA) (TRI), Best Buy Co Inc (BBY), MLB.com, NBC and Apple Inc. (AAPL) (more on Apple’s relationship with Akamai later).
Meanwhile, AKAM says it helps enable more than $250 billion in e-commerce transactions annually.
AKAM also provides cloud networking solutions to enterprises. The company says its cloud networking products accelerate applications, reduce bandwidth costs and bring the Internet and public clouds into private networks. In October, Akamai announced that it would partner with the cloud computing division of Chinese telecom giant China Telecom Corporation Limited (ADR) (CHA). AKAM also partners with many other major players on cloud initiatives, including Hewlett-Packard Company (HPQ) and Verizon Communications Inc. (VZ).
Akamai also should benefit a great deal from the emerging Internet of Things phenomenon. Internet of Things refers to the connection of all types of objects — including appliances and wearable objects such as watches and glasses — to the Internet. Research firm Gartner has estimated that there will be 26 billion objects (aside from PCs tablets, and smartphones) connected to the Internet by 2020, up from about 900 million in 2009.
Akamai’s services can facilitate the Internet of Things by working around bottlenecks in data flows, according to the company’s product director of enterprise web solutions, Gary Ballabio. AKAM also can provide processing services for Internet of Things projects, thereby reducing the strain on its customers’ systems, ITwire quoted the executive as saying.
AKAM also is exposed to the rapidly growing Internet security sector. The company has a “unique solution to defend against denial of service attacks and filter out Web layer attacks,” Akamai CEO Tom Leighton told Fox Business in October. Internet security is AKAM’s fastest-growing business, Leighton noted.
One Potential Headwind for Akamai Stock
Akamai is facing a significant threat. Specifically, AKAM still lists Apple as a customer, but Apple reportedly built its own content delivery network and, earlier this year, used it to help deliver updates to its operating system on two occasions.
However, Wells Fargo analyst Gray Powell wrote in February that losing Apple’s business would reduce Akamai’s revenue by “a fairly minimal” amount, according to Barron’s. The analyst believes that AKAM may have obtained just under $100 million in revenue from Apple in 2013, and estimated that Akamai’s 2014 revenue would be $1.8 billion.
Akamai stock dropped heavily around the time this news was reported, but has bounced back since then — so investors might have accepted the idea that Akamai could lose its entire Apple business and still be OK.
Some investors could worry that other AKAM customers may follow Apple’s lead, but most companies probably won’t want to spend the time or money needed to build their own content delivery network. Furthermore, Akamai’s many growth engines would enable it to overcome the loss of a few customers over the longer term.
Bottom Line
Akamai stock is relatively inexpensive, trading at just 22 times analysts’ consensus 2015 earnings per share estimate. That’s pretty cheap, considering its EPS net income rose 23% year-over-year in the third quarter, and its revenue surged 26% versus the same period a year earlier.
If AKAM does drop more than 5% on any negative news involving Apple, longer-term investors should buy Akamai stock on weakness.
As of this writing, Luke Rollins did not hold a position in any of the aforementioned securities.
