It is a red day for the market as a slew of earnings came in after-hours on Tuesday that disappointed investors. But one company that didn’t disappoint with quarterly numbers is Akamai Technologies, Inc. (NASDAQ:AKAM). The cloud delivery company reported better-than-expected revenue and earnings. Consequently, AKAM stock is up 5% in Wednesday afternoon trade.
But at $54 and change, AKAM stock is still well off its 52-week high of nearly $72. Plus, AKAM stock trades at a rather reasonable 21-times this year’s earnings estimate. That is a pretty reasonable multiple considering investors get exposure to the cloud, cyber-security and over-the-top (OTT) streaming markets.
So is this an opportunity to buy a secular growth stock that is finally back to its winning ways?
I think so. But I also think valuation will start becoming a concern once this stock pops up into the 60s.
Akamai, Cloud Security and Over-The-Top Entertainment
The Akamai growth narrative is really quite good. On one end, the company’s fastest-growing segment is its Cloud Security solutions. Revenues in this segment are consistently growing around 25% to 35% year-over-year each quarter. Cloud Security revenues now account for about a fifth of Akamai’s total revenues.
The hyper-growth segment will not slow any time soon. The big growth driver is the company’s Kona Site Defender solution, which has proven especially valuable given the recent environment of headline cyber-attack after headline cyber-attack. From WannaCry to Petya to Equifax Inc. (NYSE:EFX) to Whole Foods Market, Inc. (NASDAQ:WFM), it seems like cyber-attacks happen fairly often these days. Consequently, demand for AKAM’s Cloud Security solutions will inevitably ramp into the foreseeable future.
AKAM management knows this, and they are building out Akamai’s Cloud Security protfolio with a suite of new products. Among the additions is something AKAM is calling the Bot Manager Premier, which is essentially designed to stop account takeover attacks. This solution should prove to be particularly useful in a world where most hacks are based on bots trying to take over accounts.
In fact, management said on the third quarter conference call that Bot Manager Premier already has over 70 customers.
On the the other end, the company’s second big growth driver is coming from the rapid shift of content from linear to Internet mediums. This is the whole OTT transition which Netflix, Inc. (NASDAQ:NFLX) kicked off by starting the massive cord-cutting trend.
Now, many leading broadcasters want a piece of the OTT pie and are launching their own direct-to-consumer (DTC) services to compete with Netflix. See Walt Disney Co (NYSE:DIS), the traditional broadcasting giant that is set to launch 2 major DTC platforms over the next 2 years.
AKAM management believes Disney going DTC is the start of a bigger trend of everything going OTT. That would be a huge win for AKAM, since the company could leverage its close relationships with leading broadcasters to win sizable contracts.
Valuation on AKAM Still Makes Sense for Now
All in all, the AKAM growth story looks pretty good. But this isn’t some hyper-growth company with 20%-plus earnings growth potential. Instead, the Street thinks AKAM will grow earnings somewhere in the ballpark of 11% per year over the next several years.
I think that growth rate underestimates secular growth in cloud security and OTT entertainment. Consequently, I think AKAM is looking at something like 13% annualized growth over the next several years.
AKAM stock currently trades around 21-times this year’s earnings estimate. A 21-times multiple for 13% growth isn’t bad. It is good enough for a price-to-earnings/growth (PEG) ratio of about 1.6.
That is better than the S&P 500, which has a PEG of about 1.8 (19.4-times earnings for 10.6% growth). Thus, I think AKAM stock offers positive risk-reward asymmetry as long as the stock features a more attractive PEG profile than the market.
But AKAM stock starts to lose that favorable asymmetry when it gets to $60. At that point, AKAM stock would feature a PEG of about 1.8 (23.4-times earnings for 13% growth).
Bottom Line on AKAM Stock
The stock still looks good here. The valuation looks reasonable considering the exposure you get to multiple secular growth markets.
But at $60, the stock starts to look not so good. That implies another roughly 10% upside from these levels.
As of this writing, Luke Lango was long AKAM, NFLX, DIS, and EFX.