Can Akamai Continue Its Wild Growth?

Akamai has been on a tear lately, and its share price has gone up accordingly. Can the company continue this level of performance in the future?

Jul 8, 2014 at 10:05AM

Akamai Technologies (NASDAQ:AKAM) has tied its future to one of the biggest imaginable growth industries, Internet traffic, and as a result, it's seen remarkable growth for the past several quarters that's exceeding even management's expectations. It's also partnering with powerhouses such as Cisco (NASDAQ:CSCO) and Qualcomm (NASDAQ:QCOM), and it's expanding successfully into cybersecurity.

Not surprisingly, Akamai's stock is following the company's growth patterns, and it has been trading at 10-year highs in the last several months. Can Akamai's wild growth continue, and can the company make a good investment now, in spite of the historically high share price?

Predictions for traffic
Akamai's core business is content distribution. Basically, Akamai operates servers from thousands of locations around the world from which it delivers its customers' web content. This model provides improved performance and scalability for Akamai's customers, who would otherwise have to make this infrastructure investment themselves or would suffer poorer performance.

Content distribution is certainly a thriving business. According to Cisco, Internet traffic is set to exceed 1 zettabyte, or 1,000 exabytes, in 2016, and is set to triple from current levels over the next five years. Furthermore, content delivery networks such as Akamai are expected to serve 55% of Internet traffic by 2018, up from 36% in 2013. Such growth is being driven by the increasing consumption of video over the Internet, including sporting events like the Super Bowl, the Winter Olympics, and the World Cup, all of which were served by Akamai.

In the content delivery space, Akamai is still the premier solution and the market leader in spite of the proliferation of cloud providers, including such big names as Amazon.com and Microsoft. Additionally, one of the major sources of competition for Akamai is large customers who decide to develop a content delivery network in-house. However, according to management, many such customers find the task more difficult and expensive than they anticipated, and after several years, they return to working with Akamai.

Extending the core
Besides the growth in its core media-delivery business, Akamai has been partnering to extend its reach. One such initiative is the introduction of Akamai's technology into Cisco's branch routers in order to improve WAN and hybrid cloud performance. According to Network World, Akamai has strived to get access to the mainstream enterprise market for some time without much success, but thanks to the Cisco partnership, it might finally be ready to unlock this huge opportunity.

Akamai also recently partnered with semiconductor giant Qualcomm, this time for applications in the home. In January, Qualcomm's booth at CES included a presentation of a Qualcomm smart gateway integrated with Akamai's software in order to optimize delivery of content in bandwidth-constrained, last-mile networks. At the same time, Qualcomm and Akamai also demonstrated 4K streaming. While these capabilities have not been released as products yet, they are exciting new technologies that will likely be available soon.

Security
Finally, Akamai has been making a successful extension into the web security business, leveraging its distributed network to authenticate valid traffic and absorb malicious traffic. According to management, a key differentiator of Akamai's security solutions is that, by being combined with Akamai's content optimization software, they do not compromise performance, and can always be turned on.

This seems to be resonating with customers, as management recently reported that over 1,250 enterprises pay for Akamai's security offerings. As a result, security is the fastest growing segment within the company, with 26% year-over-year growth in the first quarter. With its recent acquisition of Prolexic, a specialist in protecting enterprise applications against distributed-denial-of-service attacks, Akamai will further strengthen its position in web security and continue to penetrate this growing market.

In conclusion
Akamai has shown excellent performance in recent quarters, and thanks to the expected growth of Internet traffic and Akamai's leading position as a content distribution network, this will likely continue for at least several more years. Also, Akamai can expect additional growth from its extensions into office and home environments, and from its increasingly successful security business. Even though Akamai's stock is trading at a historically high price, the company looks poised to do increasingly well in the future, and it's worth a look as a long-term investment.

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Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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