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Morningstar | Security Solutions Are Shining for Akamai, but We Think Its Core Business Is Ripe for Competition

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 content delivery networks in house. We think Akamai has done an excellent job pivoting to areas with growing demand, offering top-rate service, and making smart acquisitions. In our view, Akamai is in businesses that will continue to be in high demand for the foreseeable future, but there is little to prevent big cloud companies from offering similar value to customers. We think 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.Between 2014 and 2018, Akamai went from garnering over 18% of its revenue from its six big Internet customers to about 6%, 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%. Rather than being doomed to declining revenue, Akamai built a more robust web business, where 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 accounted for 25% of total revenue in 2018 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. 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.