Shares of Akamai Technologies ticked upward after investment firm UBS initiated coverage on the content delivery network (CDN) specialist on Friday.
Analysts there gave the stock a buy rating and $70 price target out of the gate. That’s because the firm continues to dominate the CDN space, capitalising on the exponential growth of Internet traffic — most of which is taken up with video bandwidth. In all, the company's distributed computing platform handles one-third of all Internet traffic, according to its own internal stats, and, like Google, uses sophisticated algorithms to drive cost and operational overhead out of its margins.
The $70 UBS price target is based on a 26.5 times multiple of 2015 profit estimates of $2.85 per share.
Akamai has said that it plans to achieve $5 billion in revenue by 2020, which is five times the revenue it reported last year. As for the CDN market itself, Markets and Markets estimates that it will grow from $3.71 billion this year to $12.16 billion by 2019, at a CAGR of 26.3% from 2014 to 2019. North America is expected to be the biggest market in terms of revenue contribution, while Asia Pacific (APAC) is expected to experience increased market traction with high CAGRs, in due course.
If that forecast holds true, it means that Akamai expects to continue to dominate the sector. Analysts at UBS said that they thought the goal was a reasonable one. Growth has been consistently evident: Akamai’s revenue for the second quarter of 2014 was $476 million, a 26% increase over second quarter 2013 revenue of $378 million.
Last year, it increased its market share of the media and entertainment-focused cloud video service market to nearly 30%, up from about 27% in 2012. And, it has no close competitor – and that’s putting it mildly. The other companies competing in the market, such as Limelight and EdgeCast (recently acquired by Verizon Digital Media Services, all had less than approximately 5% market share as of the end of last year.
"Akamai has a lower P/E than companies with similar financial characteristics and only a moderate premium to companies with much lower growth and margins,” said UBS stock analyst Steven Milunovich. “The stock appears attractive on our franchise factor plot, which compares companies on ROIC and top-line growth."
Forces at play in the online video market — such as the integration of more virtualised, cloud-based components within the deployment environment — is driving continued investment in infrastructure, which can only benefit Akamai in the long run.
Also, it’s worth noting that the move to 4K UltraHD and 1080p streaming will continue to create a need for more efficient content delivery. Escalating content richness translates into network complexities in managing efficient content delivery to users.
While 1080p TV screens are the norm and mobile screen resolutions continue to climb, most streamed HD content for now is still distributed in 720p or lower. However, over-the-top (OTT) services such as Netflix, VUDU, and M-GO, which exclusively distribute content over the Internet, are more eager to embrace 1080p and UltraHD for connected CE devices in order to appear more innovative, according to ABI Research. And that will require traditional pay-TV providers to also incorporate the next big thing into their service bouquets.
“We expect pay-TV operators will seriously consider 4K movie services over IP connections directly to smart TVs, bypassing the set-top box,” said senior analyst Michael Inouye. “This will allow them to compete with OTT providers on feature set before rolling out 4K-capable set-top boxes in 2015 to 2017. With the TV everywhere household user base expanding from 4% (worldwide) in 2013 to over 20% by 2019, a number of consumers will be ready for these services.”
CDN opportunity aside, Akamai has also expanded its sights, branching into cyber security with the acquisition of Prolexic earlier this year.
“Obviously, Akamai wants as many oars in the water as it can have,” said Aaron Schwartz, a research analyst at investment bank Jefferies & Co. in New York, speaking to the Boston Business Journal last year.