Home Business Akamai Stock Slides as Investors Fret Over Slowing Growth, Increased Competition

Akamai Stock Slides as Investors Fret Over Slowing Growth, Increased Competition

Akamai Stock Slides as Investors Fret Over Slowing Growth, Increased Competition

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Investors are disappointed with Akamai’s projected growth rate for its security business.

Dominick Reuter/AFP via Getty Images

Akamai Technologies

’ fourth quarter earnings report has received a cool reception from analysts and investors, who were uninspired by the company’s financial guidance. In particular, there is disappointment with Akamai’s projected growth rate for its security business, and worries stemming from cautious comments about the outlook for content delivery network (CDN) customers heavily impacted by the Covid-19 pandemic.

For the quarter, the CDN and security-software company posted revenue of $846 million, up 10% from a year ago, and above consensus at $829.5 million. Non-GAAP profits were $1.33 a share, beating expectations by two cents.

Akamai (ticker: AKAM) sees March quarter revenue of $822 million to $836 million, with non-GAAP profits of $1.28 to $1.31 a share; Street consensus estimates had been $819 million and $1.29, respectively. For the full year, Akamai expects revenue of $3.37 billion to $3.42 billion, with non-GAAP profits of $5.33 to $5.46 a share, which compares with the previous consensus estimates at $3.39 billion and $5.46, respectively.

J.P. Morgan analyst Sterling Auty responded to the results by downgrading his rating on Akamai shares to Neutral from Overweight, with a new target price of $117, down from $125. “It was a very big 2020 for Akamai,” he writes, with accelerating revenue, and operating margin hitting the company’s 30% target. “But that completes our investment thesis, and looking at 2021 with the prospects of a reversion to the mean on growth and flat operating margins, we expect the performance of the stock to be more in line with our overall coverage.”

Auty points to three issues for the company and its shares. One, he notes that pandemic-ravaged vertical markets such as retail, travel, and hospitality “are experiencing continued pressure, and as a result we would expect tougher renewal pricing” from this group, which he says accounts for 20% of revenue. Two, he notes that Akamai is guiding to 18% to 20% growth in its security segment, down from a recent 27%. And three, he says the company now expects margins to flatten after recent expansion, “while investors had been hoping to see some additional expansion targeted for the future.”

Raymond James analyst Robert Majek is more upbeat, keeping his Outperform rating and $117 target price. But he writes in a research note that while the overall guidance was in line, the growth rate for security “was a bit disappointing for some,” even factoring in the company’s generally conservative approach to forecasting. Majek adds that the focus now shifts to the company’s meeting with analysts on Feb. 25, with investors looking for more details on the long-term trajectory of the security business.

Colby Synesael
likewise keeps his Outperform rating and $162 target. He thinks the guidance was “overly conservative,” and is modeling security segment growth at 20%, at the top of the company’s projected range.

Oppenheimer’s Timothy Horan maintains his Outperform rating and $130 target, but he also sees a tougher road ahead for Akamai, citing more-difficult earnings comparisons throughout 2021. Horan points out that Akamai’s CDN business got a boost from higher streaming video and gaming traffic during the pandemic. And notes that there is “continued pricing competition in the sector, and aggressive new start-up competitors.” Adds Horan: “the stock is relatively inexpensive at 20 times earnings but will need good 2022 growth to see multiple expansion.”

Akamai stock on Wednesday is down 10.3%, to $105.82

Write to Eric J. Savitz at [email protected]

This article is auto-generated by Algorithm Source: www.barrons.com

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