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Akamai: Not Much Room for Growth?
Stock Analysis & Ideas

Akamai: Not Much Room for Growth?

Technology company Akamai (NASDAQ: AKAM) recently delivered strong Q4 results, in which both the top and bottom lines beat the consensus estimates.

Moreover, Akamai is also expected to complete the $900-million acquisition of infrastructure-as-a-service (IaaS) platform provider Linode in the current quarter. The acquisition is expected to be accretive to revenues by about $100 million and to adjusted earnings per share by $0.05 to $0.06.

Akamai’s positive guidance for Security Technology — one of its two business units — is also something to look forward to.

Moreover, the company also expects its content delivery business (CDN) to recover from the second half of this year, which is a positive as Akamai is primarily the largest CDN provider in the world.

Expert Weighs In

Following the print, Needham analyst Alex Henderson analyzed the management’s commentary as well as the company’s fundamentals.

He noticed that even though it has a strong stock value and consistent revenue generation and cash flow capabilities, there was a lack of a strong incentive for a meaningfully stock appreciation in the near term.

At first, the security growth outlook of 20% for the CY 2022 looks upbeat. However, Henderson noted that this growth rate is not all organic. The organic growth in this projection is around 17%, which is a “crucial threshold” according to the analyst, who says a deceleration is likely in CY 2023.

Moreover, the other business unit of Akamai — the Edge Technology group — has a relatively slow 3-5 year CAGR of 2%-5%, which is not enough to drive any significant share price appreciation.

A strategic ramp-up of hiring combined with merit based hikes and growth in travel and expense costs lined up for the year are likely to make it a difficult year for operating margin growth.

Nonetheless, Henderson believes that the company will be able to pull operating margin up gradually to the 31% that had initially been projected before the acquisition of Guardicore (a part of the Security Technology unit).

Henderson chose to maintain a Hold rating on Akamai. “The lack of catalysts to move shares higher gives us pause and leads us to maintain our Hold,” reasoned the analyst.

The rest of Wall Street is also modestly optimistic about the AKAM stock, with a Moderate Buy rating based on eight Buys, two Holds, and one Sell. The Akamai stock predictions indicate an average target price of $131.70.

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