Security And Compute In Focus As Akamai Reports Q2 Earnings

Akamai (NASDAQ:AKAM) is slated to report its Q2 FY’24 results on August 8.  We estimate that Akamai’s revenue will come in at about $980 million for the quarter, slightly ahead of consensus estimates and 4.5% higher compared to last year. We estimate that earnings will stand at close to $1.55 per share, slightly ahead of consensus estimates and up from $1.49 last year. So what are some of the trends that are likely to drive Akamai’s results? See our dashboard analysis on Akamai Earnings Preview for more details on how Akamai’s revenues and earnings are likely to trend for the quarter.

Akamai’s legacy content delivery business has been shrinking, as major media and hyper-scaler companies are moving delivery operations in-house. Over Q1, sales for the segment declined by about 11% year-over-year to $352 million. However, Akamai’s security segment is growing quickly with sales up 21% year-over-year to $491 million. 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. Akamai is also increasingly focusing on Application Programming Interface or API security.  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 while it also closed a deal to buy another API security player Noname Security in June. IDC Research predicts that the API security market will expand at an annual rate of 34% to nearly $1 billion by 2027.

We will also be closely watching Akamai’s progress in the cloud computing space, which the company has increased exposure to following its acquisition of Infrastructure as a Service (IaaS) provider Linode.  In 2023, the company unveiled the Akamai Connected Cloud, putting it in direct competition with deep-pocketed hyper scalers such as Amazon AWS, Microsoft Azure, and Google. Over the last quarter, Compute revenues rose by 25% year-over-year to $145 million.

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 45% 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 AAPL, MSFT, 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, with the stock trading at a forward earnings multiple of roughly 15x. Akamai could also see a meaningful upside if it executes well in the computing and security market – which are sizeable and lucrative. Our $121 price estimate for AKAM stock is 25% 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 7/26/2024
[2] Cumulative total returns since the end of 2016

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