Will Akamai’s Cloud Computing Push Pay Off?

Akamai (NASDAQ:AKAM), a company best known for its Content Delivery Network (CDN) services, has declined by about 16% year-to-date as it continues to prioritize investments in the cloud computing business. In comparison, the S&P 500 has gained about 1% year-to-date.

Now Akamai actually posted a better-than-expected set of Q4 2022 results, with revenue rising by about 2% year-over-year to $928 million, ahead of its upper end of guidance of $915 million. Adjusted earnings also stood at $1.37 per share, ahead of guidance and consensus estimates. However, the company’s guidance for 2023 was lighter than anticipated. Moreover, investors have been concerned about a pivot of sorts to Akamai’s strategy. The company’s security business has been a big driver of its growth in recent years with sales expanding by 22% and 16% respectively in 2021 and 2022. However, Akamai is now increasing its exposure to the compute space, following its acquisition of Infrastructure as a Service (IaaS) provider Linode in February 2022 for roughly $900 million. Last month, the company unveiled the Akamai Connected Cloud. This puts the company in direct competition with deep-pocketed hyper scalers such as Amazon AWS, Microsoft Azure, and Google. The company is also planning to boost capital expenditures meaningfully to build out its cloud data centers, projecting that it could spend roughly 21% of revenues as Capex for 2023, up from about 13% in 2022.

So does the recent sell-off present an opportunity to buy Akamai stock? The stock remains down by about 40% from the highs seen in 2022. Akamai’s valuation is quite reasonable.  The company is projecting Non-GAAP earnings of between $5.40 to $5.60 per share, translating into a forward earnings multiple of 12x. Akamai could see a meaningful upside if it executes well in the compute market – which is sizeable and lucrative. The company has some advantages in the space. For example, 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. The company has integrated the 11 data centers it acquired via the Linode deal into its edge locations and plans to build 14 more data centers. The company is also focusing on more distributed sites in locations that are currently underserved by traditional clouds. Akamai could also bank on the key customers of its CDN solutions such as media companies as well as e-commerce companies to sell its computing services. We value Akamai stock at about $97, which is about 32% ahead of the current market price. See our analysis on Akamai Valuation: Is AKAM Stock Expensive Or Cheap? for more details on what’s driving the company’s valuation and how it compares with peers.

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