Akamai (AKAM) Stock Slips on a Downgrade to Sector Weight at KeyBanc, Analyst Sees $600M Acquisition of GuardiCore as Expensive

October 4, 2021 7:55 AM EDT
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Price: $107.93 -0.57%

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KeyBanc analyst Brandon Nispel downgraded shares of Akamai Technologies (NASDAQ: AKAM) to Sector Weight from Overweight following the acquisition of GuardiCore.

AKAM announced the acquisition last week that will see the company roughly $600 million. AKAM projects GuardiCore to generate $30-35 million in revenue for 2022.

"Given the recent surge in ransomware attacks and increasingly stringent compliance regulations, investing in technologies to reduce the spread of malware has become mission critical," said Tom Leighton, chief executive officer and co-founder, Akamai Technologies.

"By adding Guardicore's leading micro-segmentation products to Akamai's comprehensive portfolio of Zero Trust solutions, we believe Akamai will be able to provide the most effective way to combat ransomware on the market today."

However, Nispel believes the $600 million price is too steep for GuardiCore. Hence, the downgrade to SW.

“We raise our 2022 security revenue estimate by 2.2% and total revenue estimate by 0.9% to reflect the acquisition of GuardiCore. We believe the $600M acquisition price is steep at 17-20x 2022 P/S relative to the accretion to revenue. In addition, we believe investors are unlikely to pay a premium for this growth, because while growth expectations might increase, valuation multiples are likely to decrease given the inorganic contribution to growth,” Nispel said in a client note.

“AKAM guided investors to expect 29-30% non-GAAP operating margins in 2022 vs. our prior expectations of 32.7% and consensus of 31.7%. Further, while AKAM expects to get back to at least 30% operating margins by 2023, 30% is far below our prior expectation for >34% suggesting need for investment. We continue to value AKAM on EBITDA, though believed there could have been a re-rating for AKAM if the Company outlined a stronger capital allocation strategy, but without a dividend and near-term margin pressure an overhang on shares, we expect the stock to trade within its historical range of 8-12x out-year EBITDA.”

Shares of AKAM are down over 2% in pre-open Monday.

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