Akamai Is Doubling Down On API Security. Is The Stock Attractive At $95?

Akamai (NASDAQ:AKAM) stock has had a tough year, declining by 20% since early January, compared to the Nasdaq-100, which has gained about 11% over the same period. Akamai’s Q1 2024 earnings were reasonably strong, with the company seeing revenue grow by about 8% year-over-year to $987 million, with adjusted earnings coming in at $1.64 per share, up 17% year-over-year. However, Akamai’s guidance for Q2 was weaker than expected, as the company expects a stronger U.S. dollar, cost optimization by a large social media customer, and a broader slowdown in traffic growth in the industry to weigh on its content delivery business.

While Akamai’s legacy content delivery business has been shrinking, with sales down by about 11% year-over-year to $351 million as major media and hyper scaler companies are moving delivery inhouse, the security business saw strong growth, rising by 21% year-over-year to $490 million. The company also raised its annual guidance for its security and computing business, targeting a growth rate of 17% and 23% at the upper end.

Akamai’s growth in the security space is encouraging. Akamai has combined its various security offerings into the Akamai Guardicore platform, integrating a combination of micro-segmentation, Zero Trust Network Access, multi-factor authentication, DNS firewall, and threat hunting.  Earlier this month, 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.

AKAM stock has seen little change, moving slightly from levels of $105 in early January 2021 to around $95 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Overall, the performance of AKAM stock with respect to the index has been lackluster. Returns for the stock were 11% in 2021, -28% in 2022, and 40% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AKAM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AKAM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We remain bullish on Akamai stock for a couple of reasons.  Akamai’s valuation is quite reasonable. The company has guided for non-GAAP earnings of between $6.20 and $ 6.40 per share for this year, translating into a forward earnings multiple of roughly 15x at the upper end. Akamai could see a meaningful upside if it executes well in the security market as well as the computing market – which is sizeable and lucrative. Our $120 price estimate for AKAM stock is about 20% 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.

[1] Returns as of 5/14/2024
[2] Cumulative total returns since the end of 2016

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