Tough to Justify Akamai's $48 Stock Price on Valuation

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Akamai ( AKAM ) is leader in content delivery and value added services business. The company not only operates a global network of servers that help large websites like Yahoo ( YHOO ) and Monster ( MWW ) deliver content to their end users, but also makes significant money from value added services that enhance website performance and security.

We currently estimate Akamai's price to be $31.11 , which is about 35% below current market price of about $48. The company's stock price has increased significantly over the past 9 months given the success of its value-added services and overall solid revenue growth.

So how can Akamai justify its current market price on valuation? To justify its stock price, Akamai must position itself to triple revenue per customer figures for media and e-commerce (online shopping) verticals by the end of our forecast period.

Can Revenue per Customer for Prime Growth Engines Really Triple?

Akamai's prime growth engines, media and e-commerce together constitute more than 60% of the company's value by our estimates. Given the explosion of media content over the internet and success of Akamai's value-added services, it is reasonable to assume that investors are primarily placing their bets on these two categories. Assuming Akamai continues to grab customers at our forecasted rate, the company would need to triple revenue per customer for media and online shopping verticals by the end of our forecast period to lift our valuation to its current $48 stock price.

Can this really happen? Below we explore this scenario.

Drag the trend-lines in the charts below to see the affect of various revenue per customer scenarios on Akamai's stock value.

Explosive Web Traffic Growth - Supportive Argument

Cisco estimates that internet traffic will increase more than four-fold by 2014, amounting to 64 exabytes per month. The growth is likely to be fueled by increasing affordability of devices like computers, proliferation of smartphones & tablets that promote data usage as well as growth in cloud computing.

According to Internet World Stats, the number of global internet users grew by 13% in 2009 amounting to 1.7 billion. Additionally it is estimated that the number of online videos viewed in 2009 increased by a whopping 120% amounting to 300 billion.

One can argue that given the expected four-fold rise in web traffic from 2009 to 2014, it may not be totally unreasonable to think that Akamai could increase its revenue per customer by 3-fold even if one accounts for some pricing declines as a result of competition.

But we have a few reservations regarding this scenario.

Our Concerns

Can Akamai grab a steady share of the increasing web traffic or might this be directed somewhere else? We anticipate that Akamai's revenue rise will not grow linearly alongside the expected increase in internet traffic. Akamai has diversified from being just a pure-play CDN vendor to a company that earns half its revenues from value-added services.

If CDN revenues triple based on explosion in web traffic, can we expect value added services to keep pace?  Will they be able to increase linearly with web traffic too? This might also prove to be an ambitious assumption.

Let us know your thoughts on Akamai's growth prospects by providing feedback in the comment box below.

You can see the complete $31.11 Trefis price estimate for Akamai's stock here.



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 , MWW , YHOO

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