We have a Neutral rating on Akamai Technologies, Inc. (AKAM) with a price target of $40.00, representing a P/E ratio of 40.0x 2010 EPS (according to the Zacks Consensus Estimate).
Akamai is a leading provider of content delivery network (CDN) and streaming media services. Its services include dynamic content and application delivery, application performance technologies, traffic management, identification of end-user location, online storage and load balancing.
Recent Results
The company’s first-quarter 2010 results were strong, driven by increased revenue growth across all verticals, higher margins and strong cash position, which offset some of the decline in earnings.
This was the largest revenue quarter in the company’s history, representing double-digit year-over-year growth. Revenue of $240.0 million grew 14.1% from the year-ago period and 0.7% from the previous quarter.
Excluding one-time charges but including stock-based compensation expense, non-GAAP (normalized) earnings per share of 25 cents increased 1.7% from the previous quarter and 10% from the year-ago quarter. Earnings missed the Zacks Consensus expectation of $0.26 per share by $0.01.
However, Akamai provided robust revenue guidance for the second quarter. Better-than-expected demand led the company to raise its revenue guidance for 2010. Second quarter revenue is expected in the $236.0 million to $246.0 million range, which represents a year-over-year growth of 15% to 20%. Normalized earnings per share are expected in the range of 32 to 34 cents in the quarter.
Drivers of Growth
Akamai’s high-margin value-added solutions and increased traffic growth in the media and entertainment & e-commerce verticals are expected to drive incremental revenue in the coming quarters. Moreover, strength in software and HD video distribution over the Internet, online advertising growth and cloud computing initiatives will be the main growth drivers in the long term.
Akamai’s new value-added services, such as its cloud computing application and Software-as-a-Service will provide incremental revenue opportunities to the company. New customers’ signings for value-added solutions was up nearly 40% in the most recent quarter.
Approximately, 54% of total revenue in the quarter came from value-added solutions with 77% of the total customer base using at least one value-added solution. Finally, the company plans to make continued key investments in value-added services in 2010, driving growth in 2011 and beyond.
We believe the company is well positioned for the long term depending on multiple growth drivers such as increased bandwidth requirement, improved traffic growth, new offerings and value added services, increased customer wins, greater uptake of high definition streaming content, cloud computing initiatives, improved broadband deployment and excellent cash flow.
Near-Term Bumps
Intense competition has forced Akamai to lower the price for its CDN services, particularly the digital media services. In order to grab market share from both larger players as well as smaller private CDNs, we expect price cuts to be significant in 2010, hurting margins.
Akamai is facing tough competition and pricing pressure with new competitors entering the market that could suppress its bottom line. Further, owners of large networks, such as AT&T, Inc. (T) or Verizon Communications Inc. (VZ) could leverage their assets into content delivery.
Google Inc. (GOOG) or Yahoo! (YHOO) may decide to get more aggressive in the way they offer content, or equipment vendors such as Cisco Systems (CSCO) or Lucent (LU) could enter the field. Recently, Amazon.com Inc. (AMZN) announced its entry into the digital audio and video streaming business, which may pose a threat to Akamai.
Although management expects to deliver double digit top-line growth in 2010, revenue will not reach historical levels. Given the combination of increasing competition, intense pricing pressure and fewer large acquisitions relative to its revenue base, growth is likely to be slow in the near-term.
We believe shares are fairly valued as the strong first-quarter results are already priced into the stock. We therefore have a Neutral recommendation on the stock, supported by our current Zacks Rank of #3 (short-term Hold).
(Note: We are reissuing this post to correct an error in the original.)
Read the full analyst report on “AKAM”
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