Cloud And Guardicore Security Integration Will Unlock New Possibilities

Key Takeaways

• Strong growth in cloud infrastructure and security segments indicates potential future revenue expansion and opportunities within the cloud computing market.
  
• Integration of security and compute with content delivery enhances operational efficiency and cost synergies, potentially improving profitability.
  
• Geopolitical challenges and strategic shifts could pressure Akamai's revenue and margins, with exposure to transformation risks and increased capital expenditures.

Catalysts

Engages in the provision of security, delivery, and cloud computing solutions in the United States and internationally.

• Akamai is experiencing strong growth in its cloud infrastructure services, which have a current annual recurring revenue of $259 million, growing at 40% to 45%. This signals potential future revenue growth and positions Akamai well within the $100 billion market of cloud computing.
  
• The company's security segment, particularly through its Guardicore and API Security products, is generating substantial growth with an annual recurring revenue of $247 million and is projected to grow by 30% to 35% in 2025, indicating a strong future revenue stream in security.
  
• Akamai's strategy to integrate security and compute with content delivery on the same platform allows for cost synergies and operational efficiency, potentially improving net margins and maintaining profitability as the delivery business stabilizes.
  
• The company's recent expansion into adjacent security markets with holistic offerings has increased its customer base, posing opportunities for higher revenue through cross-selling security solutions to existing clients.
  
• Strategic transformations in Akamai's go-to-market approach, including increasing the focus on enterprise customers and channel partners, should enhance sales efficiency and potentially drive faster revenue growth across its business segments.

Akamai Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Akamai Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Akamai Technologies's revenue will grow by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.7% today to 14.3% in 3 years time.
• The bearish analysts expect earnings to reach $640.3 million (and earnings per share of $4.19) by about April 2028, up from $504.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, up from 21.9x today. This future PE is lower than the current PE for the US IT industry at 32.6x.
• Analysts expect the number of shares outstanding to decline by 1.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.96%, as per the Simply Wall St company report.

Akamai Technologies Future Earnings Per Share Growth

Risks

• Macroeconomic trends and foreign exchange fluctuations are noted as risks that could negatively impact Akamai's revenue and operating margins, especially given its significant international revenue exposure.
  
• The largest customer is reducing its reliance on Akamai due to geopolitical challenges and a DIY strategy, creating a potential headwind of 1% to 2% per year on overall revenue growth, which could affect total annual revenues.
  
• Akamai is undergoing a significant go-to-market transformation with potential sales force changes, which historically can lead to disruption and uncertainty, impacting short-term revenue growth.
  
• The transition to partner-driven strategies for some cloud applications may cause short-term revenue declines as some functions are moved to ISV partners, potentially impacting near-term revenue.
  
• There is a potential for increased capital expenditures, tied to geopolitical risks such as tariff implications, which could negatively affect free cash flows and operating margins.
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Valuation

• The assumed bearish price target for Akamai Technologies is $86.06, which represents one standard deviation below the consensus price target of $102.9. This valuation is based on what can be assumed as the expectations of Akamai Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $136.32, and the most bearish reporting a price target of just $72.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.5 billion, earnings will come to $640.3 million, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 9.0%.
• Given the current share price of $75.85, the bearish analyst price target of $86.06 is 11.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.