Is Akamai's Market Price Driven by Excitement Rather than Fundamentals?

Akamai ( AKAM ) operates a global network of servers that help large websites like Yahoo ( YHOO ) and Monster ( MWW ) deliver content to their end users. The company's stock has doubled from its market price of close to $25 to current price of close to $50 in last 7 months. We maintain our Trefis forecast price of $28.38.

We believe that Akamai's current market price may not reflect the fundamentals of the company. More specifically, we believe that high market price compared to our price estimate is essentially a result of market's high expectation of growth of e-commerce and media verticals.

High market expectations from value added services

We estimate that Akamai's online shopping (e-commerce) customer count will grow from little over than 1,600 in 2009 to more than 2,300 by the end of our forecast period. This reflects continuation of rapid growth being observed in the recent past.

Moreover, we also expect revenue per online shopping customer to increase to $270,000 by end of our forecast period compared to $170,000 in 2009. We believe that Akamai's success with value-added services in recent quarters, primarily in online shopping segment (e-commerce), has generated tremendous expectations amongst investors and has played its part in propelling the stock. However it must be noted with caution that value-added services are a very profitable business for Akamai and such profits will act as strong incentive for competitors to develop their expertise in this field and challenge Akamai over time.

High market expectations from online media

The current Akamai price also reflects very high expectations of investors in media business. With proliferation of online video, Akamai stands to gain from the trend. Growth of HD video will further expand Akamai's revenue opportunities. However we have already priced this expected high growth in our estimate and we believe that market expectations are inflated, driven by certain recent successes in the field of online media.

These include record data streaming during the recent FIFA World Cup, Netflix's online content content acquisition spree, new online subscription and pay per view video platforms on Hulu and Youtube that are currently being tested, expansion of streaming into a host of mobile and stationary devices and emergence of tablet computers. Although we should see rapid growth in online media, it will be unreasonable to expect it to replace pay-TV anytime soon.

You can see the complete $28.38 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 Nasdaq, Inc.

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

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