Better Buy: Akamai vs. Cloudflare
The heightened market volatility has led several fundamentally sound tech stocks to plunge significantly in price this year. However, given the solid long-term prospects of the tech industry, software companies...
The heightened market volatility has led several fundamentally sound tech stocks to plunge significantly in price this year. However, given the solid long-term prospects of the tech industry, software companies Akamai (AKAM) and Cloudflare (NET) could rebound. But which of these stocks is a better buy now? Read more to find out. .
Akamai Technologies, Inc. (AKAM) provides cloud services for securing, delivering, and optimizing content and business applications over the internet in the United States and internationally. On the other hand, Cloudflare, Inc. (NET) operates as a cloud services provider that delivers a range of services to businesses worldwide. It offers an integrated cloud-based security solution to secure a range of platforms.
Historically high inflation remains unbattered despite interest rate hikes. Consequently, the Fed is likely to announce further rate hikes shortly. Such anticipation has led to an overwhelming deterioration in the performance of tech stocks, evident from the NASDAQ Composite's 30.9% year-to-date decline. However, given the solid long-term prospects of the tech industry, fundamentally sound tech stocks are expected to bounce back soon.
Furthermore, cyber threats and relative crimes are rising amid increased online activities and a predominantly hybrid work culture. According to Embroker, IoT cyber-attacks are expected to double by 2025. Business operators are looking for smart software solutions to secure their valuable online data. This surging demand is estimated to drive significant profit margins for software companies worldwide, which should benefit both AKAM and NET.
AKAM has lost 23.1% over the past year, while NET has lost 55.8%. Moreover, AKAM has lost 7.7% over the past month, compared with NET's 37.4% decline. Which of these stocks is a better buy now? Let's find out.
On June 6, 2022, AKAM launched its Malware Protection, which shields web applications and APIs from cyber threats. In today's world of increased online activity, this convenient application aims to offer heightened protection to all its customers by filtering malice "at the edge', thereby providing improved security output.
On the other hand, on May 5, 2022, Matthew Prince, NET's co-founder & CEO, said, "Our largest customers continue to get larger, with those spending over $1M a year growing 72 percent year-over-year."
He added, "The key to our success and customer expansion is innovating at an unrelenting pace and continued interest in consolidating behind a single vendor that can power multiple network services at scale."
Recent Financial Results
AKAM's revenue increased 7.2% year-over-year to $903.65 million for the first quarter ended March 31, 2022. Its non-GAAP income from operations came in at $270.10 million, up 2.4% year-over-year, while its non-GAAP EPS came in at $1.39, compared to $1.38 in the year-ago period. Moreover, its adjusted EBITDA came in at $391.28 million, up 4.2% year-over-year.
NET's revenue increased 53.7% year-over-year to $212.17 million for the first quarter ended March 31, 2022. Its non-GAAP net income came in at $3.45 million, compared to a loss of $9.33 million in the prior-year period, while its non-GAAP EPS came in at $0.01, compared to a loss per share of $0.03.
Past and Expected Financial Performance
AKAM's revenue grew at a CAGR of 8.6% over the past three years. Analysts expect AKAM's revenue to increase 5.6% in the current year and 8.3% in the next year. The company's EPS is expected to grow 14.1% next year. Moreover, its EPS is expected to grow 10.7% per annum over the next five years.
On the other hand, NET's revenue grew at a CAGR of 50.9% over the past three years. Analysts expect the company's revenue to increase 46% in the current year and 36.1% in the next year. The company's EPS is expected to grow 160% in the current year and 200% in the following year.
AKAM's 17.46% net income margin is higher than NET's negative 35.83%. Also, AKAM's EBIT margin and EBITDA margin of 23.00% and 34.26% are significantly higher than NET's negative 18.27% and 11.39%, respectively. Furthermore, AKAM's ROTC of 6.90% compares with NET's negative 5.01%.
Thus, AKAM is more profitable here.
In terms of forward EV/Sales, AKAM is currently trading at 4.81x, lower than NET's 15.96x. In addition, AKAM's forward EV/EBITDA of 11.15x is 92.3% lower than NET's 144.14x.
Thus, AKAM is a relatively affordable stock here.
AKAM has an overall rating of B, equating to Buy in our proprietary POWR Ratings system. On the other hand, NET has an overall rating of D, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
AKAM has a B grade for Value, consistent with its lower-than-industry valuation multiples. AKAM's forward EV/EBITDA of 11.15x is 7.5% lower than the industry average of 12.06x. On the other hand, NET has a Value grade of F, consistent with its 144.14x forward EV/EBITDA, significantly higher than the industry average.
AKAM has a B grade for Quality, in sync with its higher-than-industry profit margins. AKAM's trailing-twelve-month levered FCF margin of 22.03% is 130.3% higher than the industry average of 9.56%. On the other hand, NET has a C grade for Quality. NET's 8.66% trailing-twelve-month levered FCF margin is 9.5% lower than the industry average.
Amid increased virtual activities, strong demand for software tools and services should bode well for AKAM and NET. However, AKAM's relative affordability and higher profitability make it a better buy here.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software-Business industry here and the Software-Security industry here.
AKAM shares were trading at $87.72 per share on Tuesday afternoon, down $3.34 (-3.67%). Year-to-date, AKAM has declined -25.05%, versus a -21.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
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