Shares of Massachusetts-based cloud services provider Akamai Technologies, Inc. (AKAM) tumbled last week after the company delivered weaker-than-expected guidance for 2021. The stock has lost 16.2% over the past five days.
However, AKAM’s fourth quarter results beat expectations. It capped off an excellent year, surpassing $3 billion in revenue and achieving record earnings per share.
With the continued surge in online activities, the need for more server space is also rising. Thus, we believe the stock has plenty of upside despite its recent price decline.
Let me prove why AKAM could soar in the near term:
Strong Demand for Cloud Computing
The growing demand for public cloud services has been increasing cloud adoption significantly. Business continuity is providing the impetus for organizations to rapidly accelerate their digital business transformation plans. In fact, according to a recent Gartner survey, almost 70% of organizations using cloud services today plan to increase their cloud spending in the wake of the disruption caused by the COVID-19 pandemic.
These factors have led to record traffic levels on AKAM’s network and strong demand for its Cloud Security Solutions. As internet users’ reliance on the internet continues to grow, , AKAM should gain steadily in the coming months.
Acquisition of Inverse Expands Portfolio
On February 1,AKAM agreed to acquire Inverse, a Montreal-based data repository provider, to enhance its enterprise security capabilities and expand its portfolio of zero trust and secure access service edge solutions for IoT. AKAM believes that this will help it create an industry-leading solution and add more users to its platform.
Impressive Fourth-Quarter Results
AKAM’s revenue increased 9.6% year-over-year to $846.29 million in the fourth quarter ended December 31, 2020. Its adjusted EBITDA grew 14% from the year-ago value to $364 million, while its non-GAAP net income rose 9% from the prior-year quarter to $220 million.
The company’s cloud security solutions’ revenue increased 24% year-over-year, while its revenue from Internet Platform Customers grew 11% year-over-year. AKAM’s Web Division revenue for the fourth quarter was $438 million, up 5% year-over-year and up 4% when adjusted for foreign exchange.
AKAM’s trailing-12-month gross profit margin of 64.6% is 34.7% higher than the industry average 48%. The company’s EBITDA margin of 31.63% also compares favorably with the industry average13.16%. Moreover, the company’s cash from operations in the trailing 12 months of $1.22 billion is significantly higher than the industry average $128.02 million.
Impressive Revenue and Earnings Outlook
Analysts expect the company’s revenue to increase 8.5% in the current quarter, 6.5% in the current year and 6.6% next year. Its EPS is expected to grow 8.3% in the current quarter, 3.4% in fiscal 2021 and at a rate of 10.4% per annum over the next five years.
Consensus Price Target Indicates Solid Upside
Currently trading at $101.59, Wall Street analysts expect the stock to hit $126 in the near term, which indicates a potential upside of 24%.
Favorable POWR Ratings
AKAM has an overall rating of B, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
The POWR Ratings also evaluate stocks by various components, such as Value, Momentum, and Quality. In fact, the Value grade is determined by looking at 31 different factors. AKAM has a Value Grade of B. This is in sync with the stock’s non-GAAP forward p/e of 18.3x, which is 34.9% lower than the industry average 28.10x.
AKAM also has a Momentum grade of B, consistent with the stock’s 88.2% gains over the past five years.
To see additional POWR Ratings for Stability, Sentiment, Quality, and Growth for AKAM, Click here.
The stock is ranked #19 of 81 stocks in the C-rated Technology – Services industry.
There are several other top-rated stocks in the same industry, click here to access them.
AKAM is definitely a good stock to buy on the dip given the record traffic levels on its network, continuous investment and acquisitions, and impressive revenue and earnings growth. Also, the company is poised to gain from higher demand for data computing triggered by rapid deployment of 5G and IoT devices proliferation.
Note that AKAM is one of the few handpicked stocks currently in the Reitmeister Total Return portfolio. Learn more here.
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AKAM shares were trading at $100.02 per share on Thursday morning, down $1.93 (-1.89%). Year-to-date, AKAM has declined -4.73%, versus a 3.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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