) 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 (
), InterNAP Network Services (
) and Level 3 (
Our price estimate for Akamai's stock stands at
implying a premium of roughly 15% to the market price. Below
we look at some upside and downside scenarios to its stock
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
Summary of Key Drivers
Revenue per online-shopping customer
: This refers to the average revenue from each Akamai online
shopping customer. Such customers include retailers like Amazon (
), 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
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
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.
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
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
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.