Akamai Technologies (NASDAQ:AKAM) stock has moved up by more than 40% this year. It has outperformed the overall US stock market as measured by the main averages like Dow, S&P, and Nasdaq. The company's overall growth is expected to slow in the coming year. In this article, we will explain why it makes sense to invest in the company. First, we will explain the company's moat in the CDN and security industry. We will explain how its security services differ from those offered by other companies. Further, we will explain how the rise of 5G will lead to more demand. Finally, we will show that the company is reasonably valued.
Akamai Technologies recently celebrated its 20 years as a public company. The company's stock price reached a peak of $328 during the dot com bubble. It then crashed to less than $3 in 2002 and then started moving upwards. As of this writing, the company's stock is trading at $85. It has gained by more than 240% in the past decade.
The reasons for this are clear. Internet traffic has risen significantly. This was driven by the mass adoption of video and other multimedia products. At the same time, online vulnerabilities increased. Reports suggest that hackers steal more than $45 billion every year.
This macro theme has had positive impacts on Akamai, a company that provides cybersecurity and content delivery technologies to companies. This has seen the company be the trusted provider of security and CDN services to the top ten banks in the United States and Europe. It is also trusted by large companies like Electronic Arts (EA), eBay (EBAY), PayPal (PYPL), and Sony among others. The company achieves this partly because of its strong network of servers, which are found in 4,000 locations, 1,000 cities, and 137 countries.
At the same time, competition has been increasing. On CDN, while the company is a clear market leader, other companies like Amazon (AMZN) and Cloudflare (NET) have come up. The same is true when you look at the web security industry, where companies like CrowdStrike (CRWD) and Imperva (IMPV) are seeing impressive growth.
This has led to Akamai's growth to stagnate. In the most recent quarter, Akamai's revenue grew by 7% to $710 million. Growth has been declining from a high of 25% in 2015 to 7% in the most recent quarter. The same is true when you look at the company's annual revenue. In 2018, the company had more than $2.71 billion in revenue. In 2017, the company had a comprehensive revenue of more than $2.8 billion. In 2009, it had a total revenue of less than $1 billion. This is incredible growth. The market expects the revenue to reach $2.86 billion in 2019 and $3.1 billion and $3.29 billion in 2020 and 2021 respectively. In other words, Akamai will not continue to grow as it used to do in the past.
Many analysts bearish on the company have argued that increasing competition means that the company may find itself having challenges competing. There could be some truth on that. Also, it is true to say that Akamai is not a growth story as its peers like Cloudflare and Fastly (FSLY) are. However, a case for investing in Akamai can be made when you consider the moat it has in the industry.
Multiple reports by Gartner (IT) show that Akamai is the market leader in a number of products. For example, a recent report identified Akamai as a leader in web application firewalls for the third year in a row. The company was also identified as a leader in Forrester's (FORR) Forrester Wave report. The company was also listed as a leader by IDC on its Marketscape Worldwide CDN report.
This recognition, coupled with Akamai's products, has made the company attract some of the biggest companies as customers. In the coming years, we expect that the introduction of 5G will lead to more web traffic and the demand for security and CDN services. As such, while Akamai's days of being a growth story are behind it, we expect that it will continue to be an essential cash flow generator. In the trailing twelve months, Akamai had FCF of more than $516 million, and the company has said that it will increase this FCF. This is also supported by the fact that Akamai has been expanding its margins. Its quarterly EBITDA margin has grown from 20% in 2018 to 36.77%. The company has said that it expects these margins to increase.
There are other moat-related factors that will play into Akamai's advantage. For example, the company deals with enterprise customers, who have committed themselves for multiple years. CDN and security solutions are not easily replaceable. This means that the company will continue being a good FCF generator even as the overall growth slows. In addition, even if there is a recession, a company like Akamai that provides core solutions will not be easy to replace.
As mentioned, the overall revenue is slowing down. However, the company continues to have its key segments like security continue to grow. In the last quarter, the security segment grew by 29% to $216 million. Part of the reason for this is that the company is partnering with carriers, who are then bundling the security features to small and medium companies.
Akamai Technologies has a market valuation of more than $13 billion. Even when the revenue is not growing as fast, we don't believe that the company's valuation is ridiculous. First, the company is set to cross the $3 billion revenue mark in 2020. This means that it is trading at 4x its 2020 revenue. This is not high when you consider that companies like Palo Alto Networks (PANW) and Fortinet (FTNT) are trading more than 6x their 2020 revenue. The same is seen when you consider the forward EV to EBITDA ratios and the forward EV to EBITDA as shown below.
Akamai is also working to reward its shareholders. While the company does not pay dividends, it has rewarded shareholders by continuing repurchasing its own shares. In the recent quarter, it purchased shares worth more than $176 million. This is part of an $800 million repurchase plan. All this has led to a significant decline in outstanding shares. They have declined from more than 188 million in 2012 to 161 million.
Akamai Technologies is a market leader in cloud security and other management industries. While the company's growth is slowing, the company has a moat that is a major pillar of its operations. It will continue to improve its margins and increase its cash flows. Also, it will continue to attract more large international customers even if there is a broad global slowdown. Finally, as we have shown, the company's valuation appears to be reasonable.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.