In the medium term, cloud service provider Akamai (AKAM) is likely to ride Apple’s (AAPL) coattails higher. But AKAM stock has many other strong, positive catalysts.
AKAM operates a leading Internet content delivery network, or CDN — a group of servers that speed up the delivery of online video and online media content. AKAM’s revenue and profits increase in line with the amount of Internet bandwidth that its customers’ users consume.
Apple, one of AKAM’s largest customers, has released a new Internet music streaming service, and many media outlets report that the tech giant plans to unveil a new TV Internet streaming service in the fall.
Both services will use a significant amount of bandwidth and both should prove to be popular with Apple’s millions of users. As a result, the services should meaningfully boost AKAM’s financial results.
The Apple TV service could quickly become quite pervasive in the U.S., where dissatisfaction with cable companies is running high and cord cutting is rapidly going mainstream. According to The Wall Street Journal, the AAPL service will feature 25 channels and cost $30 to $40 per month.
That puts the cost lower than most cable bills and still provide more than enough content for most millennials and Generation Xers who will probably also have online TV services such as Netflix (NFLX), Amazon (AMZN) Prime or Hulu.
Apple’s streaming music service could also attract tens of millions of users. In January, Spotify said that it had 15 million paid subscribers, up from 10 million seven months before, so there is clearly a significant market for paid music streaming.
Apple is reportedly looking to sign up 100 million users to its own music streaming service. With its mammoth user base and massive iTunes music library, Apple certainly has some built-in advantages as it looks to reach that goal. And its price point of $14.99 per month for six users should be more attractive than Spotify’s $14.99 for two users, although Spotify said that it plans to match Apple’s price.
Despite these catalysts, Macquarie Capital recently downgraded Akamai stock from “outperform” to “neutral.” According to the firm, investors had expected AKAM to begin receiving revenue from the Apple TV service in the second half of this year, but the product will not significantly boost AKAM revenue until the second half of 2016.
However, history suggests that AKAM stock could soon start to climb sharply as investors anticipate the introduction of the Apple TV streaming product later this year.
Click to Enlarge NXP Semiconductors, (NXPI) whose chips power Apple’s mobile payment system, Apple Pay, saw its stock begin to climb fairly sharply around January 2014, about eight months before Apple Pay was announced.
Of course, NXP received royalties for each iPhone 6 that was sold, while AKAM is counting on increased bandwidth usage from AAPL products to boost its profits. So even if Macquarie’s analysis is correct, NXP’s precedent suggests that AKAM stock should start rallying about eight months before that point, or around October or November of this year.
Other Tailwinds to Boost AKAM Stock
Ivan Feinseth, chief investment officer for Tigress Financial and an AKAM analyst, tells InvestorPlace that AKAM will be boosted by Apple as well as other products.
Feinseth says Akamai will benefit from the proliferation of smart TVs and an increase in the amount of 3D content that will be streamed over the Internet. Additionally, the cable companies will likely become Akamai’s customers as they will start streaming programming over the Internet, he says.
Another trend that could give Akamai a big boost is virtual reality. According to Business Insider, shipments of virtual reality headsets will grow at a 99% compound annual growth rate from 2015-2020, and the technology will be integrated into gaming, content streaming and shopping in coming years.
Virtual reality is poised to take off, and in many cases it will be streamed over the Internet, adding to the amount of data that AKAM will facilitate, Feinseth said.
Tigress gives AKAM a “strong buy” rating and owns the stock on behalf of its clients, he noted.
AKAM should also get a boost from Internet video, e-commerce, cloud computing, the Internet of Things and Internet security.
The Bottom Line
AKAM stock is up about 15% this year, easily outperforming the market despite the major drag on the company’s profits sparked by the dollar’s steep decline against the euro.
Going forward, AKAM stock should continue to outperform, driven by the previously identified catalysts plus the additional catalysts of Apple’s products, increased use of other Internet TV systems, and virtual reality.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
