Focus On Cloud And Cybersecurity Will Strengthen Future Market Position

Key Takeaways

• Akamai's transition to cybersecurity and cloud computing, with strong growth in security products and new market expansions, promises stable and increasing revenue.
  
• The company's strategic cloud and security focus, coupled with improved savings from migration away from hyperscalers, is expected to boost margins and earnings.
  
• Political challenges, declining legacy revenues, tariff costs, and large contracts heighten financial risk, while revenue declines persist without fast-growing compensatory segments.

Catalysts

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

• The acceleration of Akamai's cloud infrastructure services, which recorded $259 million in ARR with a growth target of 40-45% in 2025, points to a significant revenue driver, particularly as more enterprises adopt Akamai's services for cost efficiency and performance.
  
• Akamai's transformation from a CDN pioneer into a cybersecurity and cloud computing company, with security products growing 16% year-over-year and expected to maintain a CAGR of 10% over the next 3-5 years, implies stable revenue growth even as older products mature.
  
• Expansion into new security markets through advanced offerings like Guardicore and API security, which together achieved $247 million in ARR, supports increased revenue prospects and higher-margin opportunities due to less competitive pricing pressure.
  
• The migration from hyperscalers to the Akamai Cloud has resulted in improved performance and operational savings, anticipated to be over $100 million annually, which is expected to positively impact net margins and provide future earnings efficiencies.
  
• Akamai’s ongoing go-to-market transformation, focusing on hunters and specialized sales for high-growth security and compute segments, is expected to enhance revenue growth by expanding the customer base and increasing market penetration.

Akamai Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Akamai Technologies's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.7% today to 15.6% in 3 years time.
• Analysts expect earnings to reach $739.8 million (and earnings per share of $4.76) by about March 2028, up from $504.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $842.9 million in earnings, and the most bearish expecting $640.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.7x on those 2028 earnings, up from 24.4x today. This future PE is lower than the current PE for the US IT industry at 43.2x.
• 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 8.72%, as per the Simply Wall St company report.

Akamai Technologies Future Earnings Per Share Growth

Risks

• The ongoing political challenges faced by large customers, such as the risk of the U.S. banning specific clients, may lead to reduced revenue opportunities and create volatility in Akamai's financials.
  
• The transition of some cloud services to ISV partners and the planned end-of-life for legacy products could result in declining revenue from those segments, impacting overall growth in their cloud computing solutions.
  
• The potential imposition of tariffs could create increased costs in the supply chain, eating into profit margins, and may not be easily passed through to customers.
  
• Large commitments from customers like the $100 million cloud infrastructure services contract could lead to geo-specific infrastructure builds, which might require increased capital expenditures and put pressure on short-term profitability.
  
• The forecasted decline in revenue from content delivery, estimated to continue at about a 10% decline, could be a persistent drag on Akamai's overall top-line growth if new products or segments do not scale quickly enough to compensate.

Valuation

• The analysts have a consensus price target of $106.65 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 $136.32, and the most bearish reporting a price target of just $72.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.7 billion, earnings will come to $739.8 million, and it would be trading on a PE ratio of 26.7x, assuming you use a discount rate of 8.7%.
• Given the current share price of $82.06, the analyst price target of $106.65 is 23.1% 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.