Cloud Computing And Security Investments Propel Future Growth And Margins

Key Takeaways

• Akamai's focus on expanding cloud computing capabilities and security services aims to drive revenue growth and improve net margins through high-margin offerings.
  
• Strategic acquisitions and operational efficiencies, including the adoption of their cloud solution, are positioned to increase market share and reduce operational expenses, enhancing profitability.
  
• Integration of acquisitions, lower traffic growth, macroeconomic challenges, and intensifying competition in cloud computing may impede Akamai's revenue growth and margins.

Catalysts

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

• Akamai's significant investment in cloud computing, including the development of full stack cloud computing capabilities to meet customer demand, is expected to drive future revenue growth by providing a comprehensive platform for VMs and containers, which could attract new customers and deepen relationships with current ones. This could impact revenue growth and margin expansion.
  
• The strategic focus on security, with an annual run rate of about $2 billion from security services, showcases a commitment to expanding in the high-growth cybersecurity market. This continued emphasis on security could positively impact future growth and profitability, aligning with overall revenue increases and improvements in net margins due to high-margin security services.
  
• Akamai's active strategy in acquisitions, notably the acquisition of Noname Security, emphasizes the company's intent to dominate the fast-growing API security market. This could lead to increased market share and revenue in the API security domain, impacting overall revenue growth.
  
• The company's shift towards internally using their new cloud solution for most of their apps, expected to result in over $100 million in annual OpEx savings, demonstrates operational efficiency and cost management. This could lead to improved margins over time and potential reinvestment into strategic growth areas.
  
• Akamai's unique approach by leveraging its massively distributed delivery platform for its foray into cloud computing and security not only provides operational efficiencies but also enables competitive pricing and performance advantages over centralized hyperscale cloud providers. This strategic advantage could lead to increased adoption of Akamai's cloud and security services, impacting revenue and profit margins positively.

Assumptions

• Analysts are assuming Akamai Technologies's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.0% today to 18.0% in 3 years time.
• Analysts expect earnings to reach $874.7 million (and earnings per share of $5.84) by about August 2027, up from $628.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $965.2 million in earnings, and the most bearish expecting $653.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.7x on those 2027 earnings, up from 24.2x today. This future PE is lower than the current PE for the US IT industry at 35.3x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Risks

• The decline in delivery revenue, primarily due to the integration of acquisitions and lower traffic growth in certain verticals such as retail and gaming, may impair future revenue growth and earnings, as delivery services have been a significant component of Akamai's overall business.
  
• Global macroeconomic challenges and geopolitical tensions could negatively impact the business, as mentioned, potentially affecting customer spending and, in turn, Akamai's revenue from various sectors including security and cloud services.
  
• The impact of foreign exchange fluctuations, as noted, could introduce volatility in financial results, affecting not just revenue but also net margins through potential unfavorable currency translation impacts.
  
• The need to invest significantly in the compute business to drive growth, as highlighted, might increase capital expenditures. While not currently capital constrained, aggressive expansion in this area could potentially pressure operating margins if growth does not meet expectations.
  
• The competitive landscape, particularly in the cloud computing and security sectors, is intensifying. While Akamai is expanding its offerings, the need to continuously innovate and possibly adjust pricing to remain competitive could impact net margins and earnings.

Valuation

• The analysts have a consensus price target of $115.52 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 $4.8 billion, earnings will come to $874.7 million, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $100.5, the analyst's price target of $115.52 is 13.0% 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.