Akamai To Outperform Given Market Leadership, Strong Demand, And Consistent Profitability

10/8/20

By Emerita Capital SA

Summary

  • Akamai Technologies is one of the leaders in Internet infrastructure and cloud security.
  • A low beta of 0.43 and relatively healthy profitability margins make it a stable long-term tech player.
  • Akamai's management should watch the competition and monitor the company's debt.
  • Our rating for Akamai is outperform.

Introduction

Trading at $17.8 billion in market cap, Akamai Technologies is one of the leaders in Internet infrastructure and cloud security. Its stock shows a low beta of 0.43 and relatively healthy profitability margins, making it a stable long-term tech player. One area to work on for Akamai's management is to watch the competition and monitor the company's debt. Our rating for Akamai is outperform.

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Overview

The plumbers of the Internet

Akamai owns and operates networks of hundreds of thousands of server nodes that help the Internet run smoothly. The company can be considered as the plumber of the Internet because of its role facilitating the flow of data across the world.

Akamai's servers help clients (usually other companies with a strong online presence) bring traffic faster and safer to consumers.

The use of its infrastructure is reported by Akamai separated by two types of clients as per the Q2 2020 earnings report:

  1. Web division: helps and focuses on what we would consider traditional HTML websites.
    • Some of the clients in this area are: Airbnb (AIRB), Best Buy (NYSE:BBY), Charles Schwab (NYSE:SCHW), E*Trade (NASDAQ:ETFC), IBM (NYSE:IBM), New York Post, Thomson Reuters (NYSE:TRI).
    • Revenue for Q2 2020 was $404 million (51% of total quarterly revenue), growing at 8% YoY.
  2. Media and Carrier division: services video & music streaming providers and other organizations with high bandwidth demands.
    • A few examples of clients in this division: MTV Networks, NBA, NBC, MSN, US Air Force, Riot Games, iHeartMedia (OTC:IHRT).
    • Revenue for Q2 2020 was $390 million (49% of total quarterly revenue), which is growing faster than the Web division at 20% YoY.

A global network of 300,000+ servers

The goal of Akamai's content delivery network is to reduce the delay between submitting a request for online content (being this a website, a video stream, or any other type of digital media) and the content fully loading on the consumer's device. For example, if a US consumer tries to access a website based in Australia, the data would need to cross the Pacific Ocean and the user will experience long loading times. To combat this, Akamai stores a cached version of the website in as many as possible geographical locations around the world. The company is currently offering "a single network hop" to 85% of the world's internet users (source: corporate website on 10/8/2020).

Figure 1 - Approximate location of Akamai Content Delivery Network servers

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