While everyone is speaking astir ChatGPT and AI (artificial intelligence), Akamai Technologies (NASDAQ:AKAM) has softly launched its Connected Cloud. As I will elaborate upon later, its standard suggests that it would compete pinch hyperscalers Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) namely for nan Compute (cloud computing) business pinch nan Akamai Connected Cloud.
Ironically, contempt nan announcement only a fewer days ago, nan company's shares dropped by much than 10% astatine immoderate point, and, nan logic for this is analysts astatine RBC downgrading nan company, namely because of nan "hyper-competitive" quality of Akamai connected cloud. To supply investors pinch an thought of nan grade of volatility which has impacted nan company's stock, I person provided a comparison pinch nan one-year capacity of nan Invesco QQQ Trust (QQQ) successful nan orangish floor plan below.
However, arsenic this thesis will elaborate upon, nan downgrade is not justified, namely because of nan differentiation attack involving Akamai's world separator web and information products wherever it is up of nan hyperscalers.
I commencement by providing a little overview of really nan institution has evolved from a CDN play to a information 1 earlier embarking connected nan unreality computing transformation.
The Evolution from CDN to Cloud Compute
Akamai is nan humanities leader successful Content Delivery Network (CDN) services, which fundamentally encapsulates cache technologies that are responsible for nan Internet being accelerated successful nan first place. Well, contrary to what you whitethorn believe, accelerated net does not only dangle exclusively connected your relationship velocity but besides connected nan readiness of intermediary cache servers which by storing items for illustration frequently-used images aliases videos, offers a faster personification experience, much specifically, by circumventing nan request to download nan information from nan original source. In addition, Akamai besides provides features for illustration reliability and information for its customers.
Furthermore, arsenic seen by nan revenue by solution array below, nan information portion of nan business has been increasing faster than CDN wherever it faces aggravated title not only from pureplay for illustration Cloudflare (NET) but besides from Amazon's AWS CloudFront, Google's (NASDAQ:GOOG) Cloud CDN, and Microsoft Azure's CDN. These are hyperscalers diversifying into contented caching.
Coming backmost to information which constituted 42% of wide revenues successful 2022, nan institution proposes precocious cybersecurity solutions for companies for illustration Zero Trust Protection which, contrary to nan outdated parameter defense system, is simply a strategy whereby each persons aliases devices extracurricular of a company's web are restricted from accessing firm machine systems, isolated from successful lawsuit of definitive need. This is nan benignant of precocious information system which offers protection against nan latest threats.
Interestingly, nan Compute business which fundamentally consists of proposing IaaS aliases Infrastructure-as-a-Service (IaaS) resources, has grown by a whopping 60% from nan fiscal twelvemonth 2021 to 2022, compared to only 16% for Security. The main logic for this maturation is nan acquisition of IaaS supplier Linode, for astir $900 million successful February 2022, pinch nan woody being expected to adhd astir $100 cardinal to Akamai's revenues.
To person an thought of nan scale, $900 cardinal represents astir one-quarter of nan company's revenues for 2022, which is important and thus, this acquisition marks a turning constituent aliases translator successful Akamai's business strategy whereby it has now started to compete pinch nan hyperscalers successful summation to others for illustration DigitalOcean (DOCN).
However, this is not wholly existent arsenic hyperscalers themselves person already expanded into CDN, which is Akamai's turf, and pursuing further, nan institution is not competing simply arsenic different unreality computing supplier but, besides utilizing a differentiated approach, namely arsenic nan world's most distributed computing platform.
Distributed Computing Platform and Profitability
In this respect, Akamai's Compute business is seeing traction wrong nan media vertical aliases companies specializing successful nan processing of videos and images whose contented needs to beryllium cached. In addition, location is liking from different verticals for illustration gaming and commerce wherever capacity astatine nan outskirts aliases separator of nan web is key.
However, nan truth that nan executives besides talk astir "better capacity astatine a much competitory value point", suggests that they whitethorn person to connection discounts successful bid to beforehand nan Akamai Connected Cloud arsenic pictured above, and that profitability could suffer. Still, nan company's profitability grade arsenic pictured below, suggests that it tin tolerate immoderate further expenses without seeing its position comparative to nan IT assemblage median impacted by excessively much.
Noteworthy, having dedicated unreality offerings besides enables Akamai to prevention connected costs, namely, by moving nan Compute resources consumed by its information products to its ain infrastructure. In this way, immoderate $100 million should beryllium saved from 2023 to mid-2024.
Also, building complete its 25 years of acquisition successful caching which has translated into a beingness successful astir of nan world's server rooms done PoPs aliases Points of Presences arsenic per nan picture below, nan institution has developed a unsocial separator platform. This is fundamentally computing acold distant from metropolitan centers and enables nan institution to supply customers pinch nan benignant of geographical standard comparable pinch nan likes of nan hyperscalers, prompting its executives to word it nan world's astir distributed computing platform.
To beryllium realistic, achieving nan benignant of traction seen by hyperscalers will dangle connected really Akamai's separator architecture is integrated pinch its halfway unreality computing offerings, and, it besides has to put heavily. Thus, successful summation to nan 11 halfway information centers obtained done nan Linode woody which are now integrated into its 4,100 separator locations, nan institution is building 14 much enterprise-scale information centers.
Valuations and Risks
This implies dense Capex usage aliases 21% of full revenues successful 2023 compared to 12.7% past twelvemonth (above table) arsenic 3 information centers (out of nan 14 planned) are scheduled to travel online. Now, based connected nan eleven Linode information centers costing $900 million, only 3 information centers will costs $245.5 cardinal ((900/11)x3). Taking into information nan Capex utilization of 21%, this comes to revenues of astir $1.2 cardinal (245.5 x 5).
Now, nan institution intends to get $0.5 cardinal from Compute successful 2023 against astir $0.4 cardinal successful 2022. Therefore, nan bulk of nan gross aliases $0.7 cardinal ($1.2 - $0.5) should beryllium successful 2024. This magnitude increases nan gross estimate for FY-2024 from $3.99 cardinal to $4.69 billion, aliases beefs up nan maturation from 6.88% to 25.73% ((4.69-3.73)/3.73) arsenic per nan array below.
Now, since income are nan denominator successful nan price-to-sales multiple, nan P/S falls to 0.82x, aliases ((3.05*(6.88/25.73)) alternatively of nan first 3.05x.
With a guardant P/S of 0.82x, it intends that nan banal is importantly undervalued erstwhile compared to nan assemblage median of 2.92x by astir 72%. Adjusting accordingly, I get a target stock value of $133 (77.3 x 1.72).
This is simply a precocious stock value and location are ever banal downside risks successful a highly competitory marketplace together pinch unfavorable macroeconomics wherever nan Federal Reserve whitethorn proceed to tighten monetary proviso arsenic inflationary pressures persist. Now, pinch higher borrowing costs, travel fears of a prolonged economical slowdown. Hence, moderating my bullish position, I person a little $90 target which was nan support price earlier analysts' sentiments toward nan institution started to change.
This said, I stay highly optimistic astir nan company's Compute business.
Highlighting nan Differentiated Approach
The first logic for this is that contempt facing immoderate moderation, IT spending should proceed to climb successful 2023 according to Gartner. Second, according to Uptime, immoderate reported declines person been exaggerated arsenic corporations for illustration expanding their IT infrastructure connected nan unreality alternatively than on-premises. For this matter, nan double-digit growths of Amazon Web Services (20%) and Azure (31%) successful their past reported quarters show that amid nan slowdown, revenues proceed to grow.
Now, erstwhile faced pinch these giants and their expertise to trim prices to prolong sales, it is normal for analysts to beryllium skeptical astir Akamai's potential. However, nan CDN play brings nan separator differentiator. In this case, pinch much information being generated and processed person to subscribers (mobile users aliases work-from-homers utilizing their laptops), nan separator computing marketplace is expected to turn faster aliases astatine 37.9% from 2023 to 2030, compared to only 16.8% for nan unreality computing marketplace successful general.
Detailing further, pinch its immense CDN network comprising 4100 PoPs spanning 134 countries and astir 365K separator servers, nan institution has a much distributed separator level than Amazon pinch 410 PoPs. In comparison, Azure has astir 118 separator locations. Therefore, pinch enterprises much apt to way their unreality postulation done nan separator successful bid to return nan shortest way and optimize costs, it is Akamai that should use much from its distributed infrastructure arsenic pictured below.
On top, Akamai's secured entree work separator aliases SASE is cardinal for customers' cybersecurity requirements, and nan institution has been named arsenic a leader successful nan Gartner Magic Quadrant for 2022 acold up of either AWS aliases Microsoft.
Thus, 1 tin envision nan emergence of different unreality computing play wrong nan highly competitory market, but 1 which provides for a amended and much unafraid mobile and web experience, and builds connected its acquisition successful media transportation and intermezo experiences.
Conclusion
Thus, by considering nan merchandise differentiation aspect, this thesis has shown that Akamai should beryllium capable to compete pinch hyperscalers without needfully utilizing a discount strategy, but alternatively 1 which revolves astir providing value-added features astir separator computing and security.
I besides weighted nan banal accordingly. Still, investors should beryllium alert that, pinch galore analysts focusing exclusively connected unreality computing, location tin beryllium further downgrades, which tin consequence successful further volatility.
Finally, pinch nan integration synergies betwixt Akamai's halfway information centers and its existing separator platform, together pinch cross-selling opportunities, location should beryllium separator gains to offset immoderate of nan expenses arsenic Akamai executes its business translator process.
This article was written by
My purpose is to supply differentiated insights, whether it is for investing, trading, aliases informational reasons. For this purpose, I americium not a classical equity interrogator aliases money manager, but, I travel from nan IT world arsenic nan laminitis of Keylogin Information and Technologies Co. Ltd. Thus, my investigation is often backed by analytics and I make predominant usage of charts to support my position.I besides invest, and thus, successful this tumultuous market, I often look for strategies to sphere capital. As per my profession history below, I person wide experience, initially arsenic an implementer successful virtualization and cloud, and I was subsequently a squad leader and task lead, mostly moving successful telcos.I person besides been a mediocre entrepreneur successful existent estate, and a farmer, and for illustration to dedicate astatine slightest 5 hours per week to moving connected a non-profit basis. For this purpose, I regularly lend adjacent reviews and opinions for endeavor tech and thief needy families by providing sponsored work.As for Research, I started pinch Tech stocks earlier going Multi-Tech pinch Fintechs, Biotechs, and Cryptotechs.I person been investing for nan past 25 years, initially successful communal costs wherever nan "learned economists" would ever counsel you to "think agelong term". Got a batch of acquisition successful nan 2008/2009 downturn erstwhile I mislaid a lot. Since past I do my ain investigation and person fallen successful emotion pinch Seeking Alpha because of nan unsocial perspectives it provides to personification investing hard-earned money arsenic good arsenic entree to immoderate of nan champion financial advisors.We unrecorded only erstwhile but tin person galore "investment lives" particularly erstwhile investing successful individual stocks.
Disclosure: I/we person a beneficial agelong position successful nan shares of DOCN either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.
Additional disclosure: This is an finance thesis and is intended for informational purposes. Investors are kindly requested to do further investigation earlier investing.