AKAM (Akamai Technologies Inc.) is a Technology company that is in business of Content Delivery Networks for faster internet data delivery.
1. Product(s):
Akamai products lines are focus on faster content delivery over the internet, cloud computing and hosting services. It has around 80,000+ servers in 1000+ networks that holds cache for web-based traffic and streaming online video delivery. Some of Akamai’s products are “Web Application Accelerator” , “IP Accelerator”, “Akamai Media Delivery”, “Electronic Software Delivery”, “Dynamic Site Accelerator” and “Advertising Decision Solutions” are among major products. “Security and Protection Solution” and “Site Intelligence” are among other products offered by Akamai. Akamai delivers 15-30% of all internet traffic around the Globe.
Akamai’s top ten clients include Adobe, Apple, Audi, Best Buy, EMC, Hitachi, Home Depot, L’Oreal, Microsoft, MTV Networks. They have 20 offices in USA, approximately 2200 employees out of which 500 in R & D and 1000 in Sales (200 in direct sales).
– Product Demand
In my opinion, CDN (Content Delivery Networks) is a growing business with more business done with e-commerce and smart phone users accessing internet and watching/listening audio/video content online. Performance becomes very critical because users become very impatient and frustrated with slow internet sites and move to other competitor’s website, thus loosing business. Akamai’s leading market share in this industry will enable it to make use of internet growth until competitor invent better and cheaper technology for the same.
Akamai has acquired Velocitude recently and this will expand Akamai’s horizon into mobile phone’s data delivery networks. With rapidly growing social media website usage (i.e. facebook, twitter) on mobile and web, users are uploading/downloading pictures and video that require high bandwidth and faster content delivery. Akamai is positioned to take advantage of that with its 80,000 server already in place. So in my opinion, the demand of Akamai’s product or like products will increase and growth will depend on competitor’s product line and efficiency of product.
– Expected Life of the Product
Life of Akamai’s product may be short-lived if customer develop the technology in-house or switches to competitor’s product. Although more and more companies are outsourcing their technology work and being more depended on outside third-party vendors to provide off the shelf solutions. Switching of these solution to competitor’s product will not take much time and effort so existing customer can evaporate if competitor’s come with better and cheaper solution.
– External variables that can affect demand of the product
Growth of internet, usage of smart phones and Akamai’s technology innovation will decide the demand of Akamai’s product line. I am confident about the growth of internet and smart phone usage, so Akamai’s technology innovations and update along with pricing would be major player in getting more market share.
– Customer’s Product Reviews & Employee’s Satisfaction
Most of online reviews about employees are satisfactory, employees reviews talks about Akamai’s fast paced technology. Technology used is up to date and employees are happy working there. Two cons I have found in the blogs I have read is that, Akamai is hiring aggressively and that is diluting talent along with respective low pay satisfaction among current employees.
– Cost of Products and Competitive products
Akamai’s product have been expensive because of low competition earlier, but recently Limelight and Level 3 has emerged as strong competitors with low prices. As a result of this competition, Akamai’s had to lower down many of its renewed contracts in 2010. In Q1 of 2011 Akamai’s share price was down based because of increasing competition in this market segment.
2. Fundamentals
– Revenue Growth (in % from same quarter of previous year)
|
Q1 |
Q2 |
Q3 |
Q4 |
Annual |
2007 |
|
|
|
|
48% |
2008 |
35% |
28% |
22% |
16% |
24% |
2009 |
12% |
6% |
5% |
12% |
9% |
2010 |
14% |
20% |
23% |
20% |
19% |
2011 |
15% |
|
|
|
|
Revenue growth of Akamai seems to be good, all quarters of 2008 grew strongly followed by recession hit of 2009 quarters, but in 2010 Akamai is growing again consistently. Annual growth numbers are also consistent with economic condition in broad market. Overall revenue growth numbers look consistent.
– EPS Growth (in % from same quarter of previous year)
|
Q1 |
Q2 |
Q3 |
Q4 |
Annual |
2009 |
|
|
|
|
|
2010 |
10% |
5% |
18% |
28% |
15% |
2011 |
21% |
|
|
|
|
A very important point to quantify the management’s efficiency is to study if they are able to convert revenue growth into the income growth (EPS growth). In 2010 quarters only Q4 is where management able to convert 20% growth in revenue to 28% growth in EPS, all other quarters management fall short of that. One reason for this could be that in 2010, many of Akamai’s contracts with clients got renewed at lower prices because of competition in this industry segments.
3. Management & Directors
Akamai was found by scientists at MIT (Massachusetts Institute of Technology) in 1998. Tom Leighton and Dr. Berners Lee were among founders of Akamai’s business concept. Graduate student Danny Lewin joined Akamai to tackle the problems of Internet Content delivery.
– CEO
Paul Sagan is CEO since 1995, president since 1999 to 2010 and received $5.9M in total compensation last year. He is a director of EMC and iRobot. In past, he has served as President of Time Inc. and editor of New Media, and director of Dow Jones & Company, Digitas Inc., and Maven Networks.
Mr. Sagan, trustee of Northwestern University, a graduate of the Medill School of Journalism, co-chairman of the Medill Board of Advisors, a member of MIT Visiting Committee in the Department of Electrical Engineering and Computer Science, a member of the Dean’s council at the Kennedy School of Government at Harvard University.
-Directors
Akamai’s board of directors includes George Conrades, Martin M. Coyne II, Pamela J. Craig, Jill A. Greenthal, Daved Kenny, Pete Kight, Tom Leighton (co-founder & MIT Professor), Geofrey Moore, Frederic V. Salerno and Naomi O. Selighman. All of directors seems to have relevant industry experience and knowledge of relevant technology.
In my opinion, with all above credentials and experience, Akamai’s management and directors has enough experience and knowledge to justify the position they held in the firm.
4. Industry Analysis & Competitors
The global cloud computing market is currently estimated at approximately $37 billion and expected to hit $121 billion by 2015 at a growth rate of approximately 26%. Consequently, we consider it a significant platform for the CDN market that is likely to cross $5 billion by the end of 2013.
– Major Competitors and market share
Akamai’s has 60% of market share followed by its competitors Limelight, Level 3 and now AT&T. Akamai delivers 15 to 30% of all internet global traffic. Akamai’s competitive advantage is its position in the market where it has 80,000+ CDN servers in 1000+ networks already in place, thus Akamai has been charging more from customers resulted in higher profit margin in past. As less expensive similar services from Limelight and Level3 are reducing market share of Akamai, it has started lowering down the prices of its products. Another threat is from CDNetworks that is developing a new technology for faster content delivery into media segment.
5. Technical Analysis
(source: finance.yahoo.com)
Akamai’s recent price is more than its 20 day moving average, but less than 50 and 100 day moving average. It has been in down movement since Feb 11, when price went down its 100 day moving average and lost the momentum. By looking at 50 & 100 days we can conclude that the stock is in down momentum and for 20 day moving average being lower than current stock price, we can infer that stock price is on up momentum for at least a short run.
6. Insider & Institutional Holding
Insider holds 3.31% and Institutional clients holds 83.7% (source: Yahoo Finance) of Akamai’s equity stock. Institutional clients holding seems to be little high results in hight volatility because institutional client usually buy/sell in bulk that affect prices quickly. Institutional client holding between 40 to 55% is optimal to validate the company as good enough to buy but too much of institution client holding would create volatility and risk as Institutional client would be more efficient in getting the information and react on that information before individual investors.
7. Conclusion
Akamai is a buy in my opinion (on basis of five point scale of Strong Sell, sell, hold, buy, Strong buy). Positive points are 60% market share, leading position in the industry, track record of generating profit, achieved 1B in revenue goal, 1.24B in cash and marketable securities compared to 1.1B last year, internet and mobile data growth, client partnerships with major players in entertainment & media industry and good management. Negative points are competitors like Limelight and Level 3 are providing similar services with cheaper prices, CDNetworks coming with new technology for media content delivery, low barrier of entry to competitors.
Please post your comments or suggestions.
Disclaimer: Writer holds 200 shares of AKAM.
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