EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage on Akamai With a $55 FVE, as We Think Cloud Providers Can Replicate Its Success

We are initiating coverage on Akamai with a no-moat rating, stable trend, and fair value estimate of $55, which implies a price/adjusted earnings multiple of 14 and an enterprise value/adjusted EBITDA multiple of 8 based on our 2019 forecast, both below where the stock has traded in recent years, and leaves the stock overvalued.

Akamai operates a content delivery network, or CDN, which enables Internet content providers to offer better user experiences--by improving latency, speed, and quality--while reducing their costs. Because we think CDNs will continue to be in high demand, we think the big cloud service providers are likely to push further into the space, and we see little that prevents them from succeeding, which would eat into Akamai's market share.

To this point, Akamai has done an excellent job pivoting to areas with growing demand, offering top-rate service, and making smart acquisitions. In our view, management is focusing on the right things and developing great products, but we fear the firm is under constant threat of competitors chipping away at significant chunks of its business and must continue near-flawless execution to avoid business erosion.

Akamai has put more emphasis on its web business and security products in recent years as its biggest media customers, such as Netflix, retreated in favor of bringing their CDNs in house. Between 2014 and 2017, Akamai went from garnering over 18% of its revenue from its six big Internet customers to about 8%, as the revenue it received from them nearly got cut in half. As a result, Akamai's media business went from providing 58% of total revenue to 47%. We think the fortunes of the media business are looking up now that the big six customers no longer provide a major chunk of the firm's revenue and the move to Internet-based TV consumption continues, all while Akamai continues to operate the largest CDN. However, we expect the media division to grow much more slowly than the web division.

In Akamai's web business, it typically provides multiple products to customers that include retailers, financial-services firms, travel-related companies, government agencies, and others that benefit from having low-latency and high-quality interactive websites. Those firms also are particularly susceptible to various hacking and security threats, which left a big opportunity for Akamai to offer the security products that comprised 20% of total revenue in 2017 and were by far the fastest growing part of its business. The continuing shift that we expect to web-based transactions bodes well for the security business, but, like Akamai's media division, we don't see a moat protecting it.