Akamai: Long-Term Value Underpinned By Short-Term Upside And Strong Fundamentals (NASDAQ:AKAM)

In many ways, Akamai Technologies (NASDAQ:AKAM) is a backbone component of Internet content delivery as we know it today. With over 300,000 servers spanning 130 countries, 4,000 PoPs (Points of Presence), and 1,500 networks, it is one of the most expansive edge networks available to modern businesses looking to have their content and data delivered rapidly and securely to users across the world. It hosts content and applications for more than half of all Fortune 500 companies, and its clients straddle multiple industries, ranging from banking to retail to gaming to advertising and more.

Thesis: As a segment leader in a fragmented market and boasting a vast physical presence, Akamai offers long-term value due to its current growth metrics, strong financial position, and a positive outlook for the edge computing services market.

A Dominant Presence

In spite of heavy competition from newer, niche players, Akamai continues to dominate the content delivery space in several areas. As of Q2-20, it commanded over 87% of the media delivery solutions market and over 81% of the service support solutions market. In terms of total segment market share, Akamai holds a 4.5% share of the overall content optimization, delivery, and security market.

As a pioneer in edge computing and serverless technologies, Akamai boasts the largest programmable edge in the world - the Akamai Intelligent Edge Platform - with enviable related IP: roughly 20% of the company's 400+ patents cover innovations in edge computing. In addition, revenues of $2 billion were generated from edge computing solutions for the 12 months ending June 30, 2020, per a company blog post. Its edge computing solutions span a range of use cases in cutting-edge technologies, as shown in the table below:

Source: Akamai Blog

With its expansive fingers in so many future-friendly pies, Akamai is well positioned to keep growing over the next several years. That brings us to recent growth trends and indicators for future growth.

Recent Growth Trends and Future Growth Indicators

Despite being a leader in several segments within content delivery and application hosting, the company has managed to keep showing straight-line revenue growth over the past several years. Over the last decade, the company has nearly doubled its revenues even though smaller competitors like Fastly (FSLY) have been growing aggressively during that time.

In Q2-20, Akamai's revenues grew by 12.7% to nearly $800 million over Q2-19. For H1-20, the revenue growth rate stands at over 10% over the prior period. On a TTM basis, revenues grew 8.8% between June 2019 and June 2020. This shows increasingly strong growth in spite of fast-growing competitors.

Source: Seeking Alpha Charting

At the bottom line, the company has been showing impressive growth for its scale and size. Although TTM earnings growth was relatively flat until mid-2018, since then, it's grown by more than 150%. In the past three years, the stock price has more than doubled, indicating strong price return momentum. Despite this, and the fact that the company is posting +20% net income margins as the bulk of its competitors continue to post net losses, the stock is still trading at forward non-GAAP earnings ratio of around 22, which is well below the sector median of around 27.

In the short term, the company expects Q3-20 revenues of $760 million to $785 million, or 7% to 11% over the prior period on a constant-currency basis. Diluted non-GAAP EPS is forecasted at $1.20 to $1.24, representing a growth rate of between 8% and 12% over the prior period on a constant-currency basis.

For FY-20, the company has guided for revenues of $3.125 billion to $3.175 billion, which includes $1 billion in revenues from the Cloud Security Solutions unit. The segment brought in revenues of $499.6 million for H1-20, representing a 26.5% increase over the prior period's revenues of $394.9 million. The growth was primarily driven by elevated media traff...

In many ways, Akamai Technologies (NASDAQ:AKAM) is a backbone component of Internet content delivery as we know it today. With over 300,000 servers spanning 130 countries, 4,000 PoPs (Points of Presence), and 1,500 networks, it is one of the most expansive edge networks available to modern businesses looking to have their content and data delivered rapidly and securely to users across the world. It hosts content and applications for more than half of all Fortune 500 companies, and its clients straddle multiple industries, ranging from banking to retail to gaming to advertising and more.

Thesis: As a segment leader in a fragmented market and boasting a vast physical presence, Akamai offers long-term value due to its current growth metrics, strong financial position, and a positive outlook for the edge computing services market.

A Dominant Presence

In spite of heavy competition from newer, niche players, Akamai continues to dominate the content delivery space in several areas. As of Q2-20, it commanded over 87% of the media delivery solutions market and over 81% of the service support solutions market. In terms of total segment market share, Akamai holds a 4.5% share of the overall content optimization, delivery, and security market.

As a pioneer in edge computing and serverless technologies, Akamai boasts the largest programmable edge in the world - the Akamai Intelligent Edge Platform - with enviable related IP: roughly 20% of the company's 400+ patents cover innovations in edge computing. In addition, revenues of $2 billion were generated from edge computing solutions for the 12 months ending June 30, 2020, per a company blog post. Its edge computing solutions span a range of use cases in cutting-edge technologies, as shown in the table below:

Source: Akamai Blog

With its expansive fingers in so many future-friendly pies, Akamai is well positioned to keep growing over the next several years. That brings us to recent growth trends and indicators for future growth.

Recent Growth Trends and Future Growth Indicators

Despite being a leader in several segments within content delivery and application hosting, the company has managed to keep showing straight-line revenue growth over the past several years. Over the last decade, the company has nearly doubled its revenues even though smaller competitors like Fastly (FSLY) have been growing aggressively during that time.

In Q2-20, Akamai's revenues grew by 12.7% to nearly $800 million over Q2-19. For H1-20, the revenue growth rate stands at over 10% over the prior period. On a TTM basis, revenues grew 8.8% between June 2019 and June 2020. This shows increasingly strong growth in spite of fast-growing competitors.

Source: Seeking Alpha Charting

At the bottom line, the company has been showing impressive growth for its scale and size. Although TTM earnings growth was relatively flat until mid-2018, since then, it's grown by more than 150%. In the past three years, the stock price has more than doubled, indicating strong price return momentum. Despite this, and the fact that the company is posting +20% net income margins as the bulk of its competitors continue to post net losses, the stock is still trading at forward non-GAAP earnings ratio of around 22, which is well below the sector median of around 27.

In the short term, the company expects Q3-20 revenues of $760 million to $785 million, or 7% to 11% over the prior period on a constant-currency basis. Diluted non-GAAP EPS is forecasted at $1.20 to $1.24, representing a growth rate of between 8% and 12% over the prior period on a constant-currency basis.

For FY-20, the company has guided for revenues of $3.125 billion to $3.175 billion, which includes $1 billion in revenues from the Cloud Security Solutions unit. The segment brought in revenues of $499.6 million for H1-20, representing a 26.5% increase over the prior period's revenues of $394.9 million. The growth was primarily driven by elevated media traff...