Akamai's Q2 2024 earnings were stronger than expected, with revenue rising about 5% to $980 million, while adjusted earnings stood at $1.58 per share. Growth was driven by the company's strength in the security and cloud computing space.
In May, Akamai indicated that it would be acquiring digital security company, Noname Security for about $450 million. Noname is one of the top Application Programming Interface security vendors. API security is a growing market, given that APIs - which are essentially software interfaces enabling communication between programs - handle crucial data and are attractive targets for attackers. Akamai has been seeing strong demand in this space, aided by its prior acquisition of Neosec another API security player. IDC Research predicts that the API security market will expand at an annual rate of 34% to nearly $1 billion by 2027.
Akamai has been increasingly doubling down on the cloud computing space in recent quarters, taking on the likes of Amazon, Alphabet, and Microsoft. Akamai could see an upside if it executes well in the computing market which is sizeable and lucrative. Akamai has a network of 350,000 edge servers, across 4,100 locations, which are located away from metropolitan centers, giving the company considerable geographic scale.
Akamai Technologies is a global content delivery network (CDN) and cloud services provider, focused on improving the speed, reliability, and security of online content and applications. The company is estimated to deliver between 15-30% of the global web traffic. Many popular websites use Akamai for content delivery, which means that some of the content you view when visiting these sites is delivered from a nearby Akamai server, rather than the company's servers.
We believe the Security Division is the more valuable segment within Akamai given its higher revenue base ($1.77 billion in 2023, compared to $1.54 billion for the Delivery business). Moreover, the division has also been growing faster, averaging a growth rate of about 15% over the last two years, compared to the delivery division which is declining.
Akamai's value proposition has evolved beyond being the fastest content delivery network. As competitors grow increasingly capable of fast content delivery at similar prices, Akamai has positioned itself as a full-service provider -- touting its ability to offer multiple value-added services, such as the delivery of targeted advertising and cloud-based security for its customers.
Its acquisition of Nominum, Inc. has helped it bolster its security solutions portfolio and reduce competition in this area. Such acquisitions will help Akamai protect its margins and grow its business.
Media content is rising at a significant pace as a greater amount of video moves online and video quality increases (for example HD video). Some of the services that are stimulating this trend are Netflix, Hulu, and YouTube. Although growing media demand is an opportunity, it is also a source of gross margin pressure, since one of Akamai's largest costs is the cost of bandwidth to deliver data. Akamai passes on some of these costs to customers in the form of a bandwidth usage-based pricing structure; however, Akamai's pricing will be under pressure from volume discounts and competition from other content delivery networks.
Akamai has historically charged premium prices to its customers for fast and secure delivery of its web content. However, the company is increasingly competitive on pricing, particularly on video content, to attract more customers and traffic to its network. In several deals, it has even outbid its competitors on price. This is likely to win more customers for Akamai but may put pressure on margins.
