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Akamai Technologies: Stock of the Week

Akamai (AKAM) is an impressive growth stock that is reasonably priced even in the midst of an expensive market. The company is helmed by a capable team with a consistent track record of beating earnings expectations. Further, the company is in several expanding markets. Get the full story below...

Let’s be honest…. we’re all addicted to online content. 

And this addiction is not going to end anytime soon. 

In the last two decades, an Internet connection has gone from a luxury to a necessity. We take it for granted, but streaming videos, photos uploaded to the cloud, and real-time stock quotes are only possible due to the efforts of companies behind the scenes protecting, processing, and transferring unfathomable amounts of data.

Companies like... Akamai.

According to IBM (IBM), 90% of all data created by humans was created in the last two years. And, it’s not because humans are getting smarter and more creative.

It’s because everyone is constantly connected to the Internet with a smartphone in their pockets. And with a smartphone, anyone can be a movie director, a photographer, podcaster, etc., - and add to the world’s data. 

In terms of consuming data, with a few taps and swipes, any sort of content is available to watch, listen or read nearly instantaneously. 

However, this “magic” can only happen due to companies like Akamai (AKAM) and content delivery networks (CDN) which are the connective tissue between the content-creator and your smartphone. 

Beyond being a crucial part of the Internet’s backbone, Akamai is a great stock due to its consistent record of beating earnings and a fast-growing cybersecurity division. In fact, it's more than 5 years since they had an earnings miss. Now let’s drill down to see where that operational excellence comes from. 

Business Breakdown

In many ways, AKAM is like an Internet utility that silently does the work needed to keep the gears of the digital world churning. Another similarity to a utility is there are high switching costs, meaning that Akamai generates significant amounts of recurring revenue. 

Unlike a utility, Akamai remains in growth mode due to the Internet’s continued expansion, and its success in introducing new products. 

AKAM started as a CDN (Content Delivery Network) and then expanded into cloud infrastructure services. This service helps companies improve the performance of their cloud systems, reduce disruptions, increase speed and increase security. 

Spending on cloud computing is expected to grow at a CAGR of 17.5% over the next decade. This means that with more cloud adoption, there will be increased demand for Akamai’s cloud-infrastructure management products. Like CDNs, this is another type of recurring revenue stream.  

Companies are migrating to the cloud because it’s faster, cheaper, and more powerful. The first step was moving data to the cloud. Now, increasingly entire applications are running in the cloud. 

While this is a blessing in many ways, it does make any sort of hacking or disruption even more costly. Further, what makes the cloud so awesome - distributed computing power - also means there are many more points of vulnerability. As a result, spending on cybersecurity is projected to increase at a double-digit rate over the next decade.

Just like Akamai’s CDN business allowed it to take advantage of opportunities in cloud infrastructure. Managing companies’ cloud systems allow them to sell their network and cloud security software and services. This is now the fastest-growing part of the business. 

Earnings Growth

So, Akamai has the steadiness of a utility due to its stable CDN business but also growth potential with its booming, cybersecurity segment.

It takes an exceptional management team to pull this off. In many ways, quarterly earnings are like a report card for executives. By all measures, Akamai is on the Honor Roll. 

In the last quarter, the company pulled off a rare feat - it beat analysts’ expectations for sales and earnings and increased margins. In fact, Akamai has now beat earnings in the last 19 quarters.

Putting It Together

With their exceptional track record of success it is no surprise that Wall Street analysts are expecting more of the same in the years ahead. That is why the average target for the stock is $121 while many top analysts are looking for more. 

Most notable is the 5 Star analyst from Needham, Alex Henderson, who is unabashedly talking up AKAM with a street high $135 target. However, I will go on record to say that if they keep up their beat and raise traditions of the past that will prove a low target with $150 being more likely before we close the books on 2021. 

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AKAM shares were unchanged in after-hours trading Tuesday. Year-to-date, AKAM has gained 4.78%, versus a 1.28% rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.


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