AI Integration In Cloud Security Solutions Will Strengthen Market Position

Key Takeaways

• Strong growth in security solutions and cloud computing is driving revenue and margin expansion through significant contract wins and customer interest.
  
• Strategic partnerships and utilizing AI in security enhance product attractiveness, expanding market share and revenue growth.
  
• Macroeconomic challenges and restructuring impacts could destabilize revenue stability despite security and compute segment strengths, amid competitive pressures and increased operational expenses.

Catalysts

Provides cloud computing, security, and content delivery services in the United States and internationally.

• Akamai's security solutions, including new offerings in API Security and Zero Trust, show strong customer interest and significant contract wins, which are likely to drive revenue growth and margin expansion.
  
• The momentum in Akamai's cloud computing division, with compute revenue growing 28% year-over-year, is expected to contribute to increased revenue and profit margins as the company adds new compute customers across different verticals.
  
• Akamai's leverage of generative AI in enhancing its security solutions may increase the effectiveness and, consequently, the attractiveness of its offerings, potentially boosting future revenue growth and expanding market share.
  
• The expansion into new product areas and a broader market of enterprises through partnerships and a stronger channel ecosystem suggests potential revenue growth and increased margins as these have more favorable cost structures.
  
• Opportunities for growth in Akamai’s delivery business might materialize as industry traffic growth rebounds, potentially improving margins due to Akamai's scale and cost discipline, despite current headwinds and competitiveness in pricing.

Akamai Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Akamai Technologies's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.3% today to 17.9% in 3 years time.
• Analysts expect earnings to reach $878.2 million (and earnings per share of $5.81) by about December 2027, up from $526.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $596 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.6x on those 2027 earnings, down from 27.8x today. This future PE is lower than the current PE for the US IT industry at 43.8x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Akamai Technologies Future Earnings Per Share Growth

Risks

• Macroeconomic headwinds have negatively impacted the delivery business, evidenced by a 16% year-over-year decline in delivery revenue, which could challenge overall revenue stability.
  
• The introduction of restructuring charges and workforce reductions, including a $82 million restructuring charge and a reduction of 2.5% of roles, may impact operational efficiency and margins.
  
• Despite the strong performance of the security and compute segments, Akamai’s delivery unit faces significant pricing and traffic growth challenges, impacting revenue and cash flow contributions.
  
• Upcoming investments in go-to-market strategies and specialist sales staff may increase operational expenses, potentially affecting near-term net margins and profitability.
  
• The consolidation of competitors in the content delivery network market presents both opportunities and risks, as competitive pricing pressures and the sustainability of business models could affect future revenue streams.

Valuation

• The analysts have a consensus price target of $113.13 for Akamai Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $76.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.9 billion, earnings will come to $878.2 million, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 8.2%.
• Given the current share price of $97.36, the analyst's price target of $113.13 is 13.9% 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.