3 Reasons We Think Akamai Is A Buy
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Akamai To Report In Late April
Akamai (NASDAQ: AKAM) is shaping up to be a great buy going into the calendar Q1 reporting season and there are more reasons than one. Aside from the company’s great position as a cloud-focused web-services company Akamai presents a value at current levels we think should not be ignored. Along with that are consensus targets that we think underestimate this company’s revenue and earnings potential in a way that has the stock set up to outperform in 2021 and beyond.
1) The Analysts Sentiment For Akamai Has Bottomed - The analysts are still generally bullish on Akamai but the sentiment is fading. Where the consensus was close to a strong buy just three months ago the stock is only a buy at this time. The reason is that the analysts feel much of the company’s growth was priced into the stock and they were right, about two months ago, but things have changed in the time since, most notably a 20% pullback in share prices that has the stock trading just above a key support level. The consensus price target is near $120 so even with a declining sentiment the analyst community sees this stock as undervalued. If the company performs during the fiscal Q1 period as we expect, the consensus price target will start creeping higher once again.
2) The Analysts Are Underestimating Akamai - If there is one thing we know for certain about the cloud-based web-services, cloud security, and edge-computing industry is that it is growing at a high double-digit rate. Companies from Crowdstrike (NASDAQ: CRWD) to Zscaler (NASDAQ: ZS) are reporting sustained YOY revenue growth from the mid-teens through the triple-digit range depending on their size and niche and Akamai is right in the thick of business. Akamai itself is among the slower-growing with a 10% to 15% YOY rate over the past few quarters and is expected to continue growing but the consensus figures are weak and underestimate Akamai’s growth in Q1 2021.
The $829.69 million consensus target for net consolidated revenue is up 8.5% from last year but growth slows to under 10% and revenue contracts on a sequential basis but we expect this to be easily beaten because Akamai tends to beat consensus 100% of the time. The margin of error over the last few quarters is in the $18 to $20 million range or more than enough to ensure sequential growth in Q1 and 250 basis point boost to YOY growth. When that gets reported the analysts will have no choice but to up their targets for both FY revenue and earnings as well as share prices.
3) Akamai Is A Value Relative To Peers - There is no other way to look at Akamai other than as a value relative to its peers, possibly a deep value. Shares of Akamai are trading at only 19X its F2021 EPS estimate which is low relative to the broad market and its peers, and the actual figure will likely be much lower relative to current share prices. VMWare is one of the cheapest cloud stocks trading at 23X earnings, Verisign is another web service company and it trades for 37X earnings. Palo Alto Networks is deep into the cloud and web infrastructure and it trades at 55X earnings while ServiceNow and Crowdstrike trade at 90X and 602X earnings. The only difference is that Akamai’s growth rate is at the low-end of the range but we’ve addressed that. Akamai’s revenue and earnings growth are underestimated, the value is even deeper than it appears.
The Technical Outlook: Akamai Is Already Moving Higher
Shares of Akamai corrected by 20%, had an “official” bear market, and hit solid support, and then bounced. The price action looks bullish if within a large trading range and could easily see a 20% upside. The price action is being driven by Akamai’s value, the analyst’s consensus target, and the expectation for good earnings among other things. The analyst covering Akamai at KeyBanc just upped the stock to OverWeight from Sector Weight citing the business model, financial stability, and undervalued growth segments outside the core business. He also sees Akamai allocating some capital to a dividend in the not-too-distant future and we think that is a real possibility. It would also be a major catalyst for buying.
Akamai Technologies is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.