UBS Sees Green Shoots at Akamai (AKAM)
UBS analyst, Steven Milunovich, sees signs of green shoots at Akamai (NASDAQ: AKAM) as new products offset slowing revenue from the company's top two customers. No change to Buy rating but the PT drops to $55 from $65.
Akamai slightly beat 4Q estimates excluding a lower tax rate. The security segment, now at a $300mn run rate, provided the upside with media and web performance in line. The highlight of comments was that the top two customers—probably Apple and Facebook—will decline from a typical 13% revenue contribution to 6%. Much of that decline will occur in 1H/16, so 1Q guidance is not great but within the Street range.
Positives are 10% growth at other media customers, coming security products such as Bot Manager and malware, and organizational realignment.
The media business remains a concern with increasing do-it-yourself efforts at the top two customers only part of the story. Other issues are whether OTT, when it arrives, will be an oligopoly that limits Akamai's success and whether competition and perhaps pricing pressure from Level 3, Verizon, and Amazon might be worse than the company admits. Media could grow by less than 5% in F16, making the $5bn 2020 total revenue target a push. At least 2016 is an even year, which could benefit 2H results (Olympics), and media results should begin to accelerate moving into 2017. The network build in advance of OTT than has not yet shown probably temporarily reduces operating margin by one point.
The promise of security, where Akamai takes a cloud-based approach, partly compensates for the slowdown in media. In addition to new offerings like Bot Manager, the company will take its recursive DNS platform Answer X into the enterprise. Web performance is growing at an 8% rate—more success in mobile might take it back to double-digits. A reorg puts product development more in sync with sales in an effort to be more responsive to customer needs.
The price target of $55 is 20x 2016 EPS of $2.68, down from 24x due to lower comps and outlook.
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Shares of Akamai Technologies closed at $39.57 yesterday.