On Friday, KeyBanc made an adjustment to the price target for Akamai Technologies (NASDAQ:AKAM), reducing it to $119 from the previous $138. The firm maintained its Overweight rating on the stock. The revision follows Akamai's first-quarter performance in 2024, which slightly missed expectations, and a guidance reduction for the second quarter and the full year of 2024. The company faced challenges due to lower-than-anticipated Delivery segment revenues and foreign exchange (F/X) headwinds.
Akamai's Security and Compute segments outperformed consensus estimates, with a 3.7% and 3.4% beat, respectively. This success was attributed to the strength in Guardicore and API security, as well as a robust Enterprise compute business, which now boasts a $50 million run rate, marking a fourfold increase year-over-year.
However, the Delivery segment underperformed due to traffic trends in gaming and video customers, which had a negative impact of $20 million to $30 million. Additionally, a large social media customer, potentially TikTok, reduced traffic on Akamai's network, leading to a $40 million to $60 million decrease.
The Delivery segment's headwinds have resulted in KeyBanc forecasting a 14% decline in the company's 2024 revenue, compared to the previously estimated 5% decrease. This revision also includes an 18% organic decline excluding contributions from StackPath and Lumen, against the prior estimate of a 9% decrease.
KeyBanc has adjusted its estimates downwards by more than 100%, mainly due to the Delivery and F/X issues, but remains positive about Akamai's ongoing transition to its Security and Compute (SC) segments. In the first quarter of 2024, SC contributed 64% of revenue, up from 57% in the same period in 2023, and 51% in 2022.
Despite a nearly 10% lower forecast for the Delivery segment, KeyBanc's earnings per share (EPS) estimates for Akamai have only been adjusted approximately 5% lower. The firm anticipates that Akamai will continue to grow these segments into 2025, further accelerating the shift towards SC, which is expected to represent over 70% of revenue by the end of 2025.
KeyBanc suggests that Akamai is on track to be a Rule of 30+ company (free cash flow margin plus top-line growth) in 2025, noting that the current valuation of less than 4 times enterprise value to CY24 estimated sales is an overreaction.
Furthermore, KeyBanc highlighted Akamai's increased share repurchase authorization, which now stands at a total of $2.4 billion, or 17% of the company's after-hours market capitalization. This move suggests that management is likely to buy back shares, indicating confidence in the company's value.
InvestingPro Insights
Akamai Technologies (NASDAQ:AKAM) has been navigating through a challenging period, reflected in their recent quarterly performance and revised guidance. KeyBanc's price target adjustment acknowledges these hurdles but maintains an optimistic outlook on the company's growth potential, especially in the Security and Compute segments. Insights from InvestingPro further enrich this perspective with real-time data and strategic observations.
InvestingPro Data shows that Akamai's market capitalization stands at $15.7 billion, with a Price-to-Earnings (P/E) ratio of 25.53. The adjusted P/E ratio for the last twelve months as of Q1 2024 is slightly lower at 24.21, suggesting a more favorable valuation when considering recent earnings. The company's revenue growth for the same period is solid at 7.01%, with a gross profit margin of 60.31%, indicating strong profitability in its core operations.
Two InvestingPro Tips highlight key strategic points: Akamai's management has been actively engaging in share buybacks, a sign of confidence in the company's intrinsic value. Additionally, the stock is trading at a low P/E ratio relative to near-term earnings growth, suggesting that it may be undervalued. Moreover, with analysts predicting profitability for the year and a record of profit over the last twelve months, Akamai's financial health appears robust. It's noteworthy that the company does not pay a dividend, which could be a factor for income-focused investors to consider.
For those seeking a deeper dive into Akamai's financials and strategic positioning, InvestingPro offers additional insights. There are six more InvestingPro Tips available, providing a comprehensive analysis of the company's performance and prospects. Interested readers can take advantage of a special offer using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
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