Akamai Upside & Downside Scenarios to $35 Value

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Akamai ( AKAM ) has been a dynamic stock. After rising to as high as $54, it has slid below $30 today. This has largely been driven by competition from companies like Limelight Networks ( LLNW ), InterNAP Network Services ( INAP ) and Level 3 ( LVLT ). Our price estimate for Akamai's stock stands at $35 implying a premium of roughly 15% to the market price.  Below we look at some upside and downside scenarios to its stock value.

Akamai's content delivery and value-added services business primarily comes from online-shopping and media verticals, which constitute about 33% and 32% to its stock respectively, as per our estimates.

Summary of Key Drivers

1. Revenue per online-shopping customer : This refers to the average revenue from each Akamai online shopping customer. Such customers include retailers like Amazon ( AMZN ), Nordstrom, Footlocker and consumer focused companies like Cathay Pacific, Audi, Best Buy (BBY), etc. We expect this figure to continue to grow and reach past $300,000 by end of our forecast period.

2. Number of online-shopping customers : The number of Akamai's online-shopping customers has grown, and we forecast this figure to reach close to 2,700 by the end of our forecast period.

3. Revenue per media customer: This figure represents the average revenue from each Akamai media and entertainment customer. Examples of media and entertainment customers include CBS (CBS), Viacom (VIA), MySpace.com, Netflix (NFLX) and the BBC. This figure dipped in 2009 but has recovered since then and we forecast it to grow past $700,000 by the end of our forecast period.

4. Number of media customers: We expect number of Akamai's media customers to grow from less than 900 K in 2008 to a little under 1,300 K by end of our forecast period.

5. SG&A as % of gross profits : This figure came down from 51% in 2005 to about 38% in 2008 and has stabilized since then. We expect only slight declines.

30% upside scenario | $46 Trefis price estimate

1. Akamai resists further pricing pressures & expands value added services (+10%)

Akamai has been facing some pricing pressure from its competitors, and as a result, has renewed some of its content delivery contracts at lower price points. However the positive side is that the revenue contribution from value-added services has been increasing and will therefore help mitigate effect of lower content delivery network (CDN) pricing.

If Akamai can defend further pricing pressure and increasingly shift its reliability to value-added services where it still has edge, it could potentially lift average revenue per customer for both online-shopping and media verticals. In addition to this, the media vertical could also benefit if media usage shifts to Internet at a rate faster than before. If revenue per customer figures for both the verticals double by end of our forecast period compared to 2010, there could be more than 10% upside to our price estimate.

2. Customer gains accelerate (+10%)

A lot depends on whether Akamai can continue to market its value-added services to its customers the way it has so far. Competition is emerging and telecoms like AT&T (T) are pushing into CDN business and offering more value-added services.

If Akamai can maintain its technology lead and lift its customer count in online-shopping vertical to about 3,000 and media vertical to about 1,500, there could be an upside of about 10% to our price estimate.

3. Improved SG&A Leverage (+10%)

The above mentioned trends could provide further leverage on SG&A and the figure could decline more than we forecast. Currently we forecast this figure to settle between 36% to 37% by end of our forecast period.

However, if this declines further to about 32% as a result of increased profits due to above mentioned scenarios, there could be an additional upside of 10% to our price estimate. (+10%)

25% downside scenario | $25.8 Trefis price estimate

1. Margins succumbs to pricing pressure (-15%)

If the recent trends continue and Akamai succumbs to pricing pressure, its average revenue per customer will decline. In addition to this if competitors come up with compelling offerings value-added services as well, it could be a disaster for Akamai.This could lead to company's revenue per customer growth to slow down significantly along with a reduction in the growth of the customer base itself.

We gauge the downside risk here by reducing online-shopping customer forecast to 2,400 and average revenue per online-shopping customer to $250,000 by end of our forecast period. In addition to this we also reduce media customer count to about 1,150 and revenue per media customer to about $650,000 by end of our forecast period. Such a situation create 15% downside to our price estimate.

2. SG&A ratio slides (-10%)

If revenues decline as mentioned above, so will Akamai's profits. This will directly impact SG&A leverage and the figure could increase back to that seen historically. Even if this figure rises to middle of the historical range (about 44%), there could be a downside of about 10% to our price estimate.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AKAM , AMZN , INAP , LLNW , LVLT

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