Cloud services provider Akamai Technologies (AKAM +26.56%) shot up 27% this year after the company posted terrific fourth-quarter results early in February, significantly outpacing the NASDAQ Composite index. The company provides content delivery network and security services to the likes of Apple (AAPL +2.08%), along with big media conglomerates and banks around the world. Recently, Apple appears to be renegotiating this relationship, but Akamai still remains a solid long-term buy.
Solid so far
Akamai posted solid results with positive earnings surprises in each of the last four quarters. Its fourth-quarter net income amounted to $80.3 million, up from $68.3 million last year. Driven by the strong adoption of its services, Akamai's revenue rose 15% to $436 million in the fourth quarter. The results were ahead of Wall Street's expectations and triggered a jump that lifted the stock to a seven-year high.
Take-up of Akamai's content delivery services has led to strong revenue and earnings growth. Its global network of servers deliver software updates, images, and other data for customers.
The road ahead
Akamai is seeing strong momentum across its video, gaming, social media, and software download customer base. Strong demand for its website and application acceleration solutions has led to growth in the performance and security solutions business. Looking ahead, higher service attachment rates of its core media, performance, and security offerings should help Akamai sustain momentum.
Furthermore, Akamai has performed well on a global basis. Its sales in North America grew 21% year-over-year in the fourth quarter, while its international segment was up 20%. Going forward, the company expects its North American business to get even better on the back of strong growth in large strategic customer accounts. Also, despite macroeconomic headwinds, Akamai saw positive business trends in the Asia-Pacific region, Europe, the Middle East, and Africa, which shows the resilience of its business.
Although Akamai is positive about its outlook, it is worried about currency fluctuations that could lead to a flat performance in foreign markets. However, once the company closes the acquisition of Prolexic, it should deliver strong profit growth in the long run due to an increase in the addressable market. After the deal is finalized, Akamai will be able to enhance its security solutions to protect enterprise applications against DDoS and other malicious attacks. This will improve the company's product portfolio and also open up more markets.
With nearly 150,000 servers spread across 1,200 networks and spanning over 90 countries, Akamai is in a good position to tap the growth of cloud services. Also, Akamai has reduced its network costs and is looking to improve its software and hardware. The company is developing a more robust and scalable network management process that should help control costs and expand services in an efficient manner.
Diversification counts, especially when you're dealing with Apple
Akamai has strategic relationships with leading carriers such as AT&T, Orange, Swisscom, Korea Telecom, and Turk Telekom. It has also tied up with Qualcomm to deliver 4K videos to consumers online. Furthermore, Akamai has key assignments such as NBC's recent online coverage of the Winter Olympic Games in Sochi, which should assist in revenue growth. Hence, Akamai has a diversified client base that should support continued long-term growth.
Diversity is another reason the company shouldn't feel a lot of heat if Apple rolls out its own content delivery network. According to Dan Rayburn of StreamingMedia, Apple is reportedly building its own content delivery network to deliver apps, video, and software. Until now, Apple has paid Akamai for these services, but the two are renegotiating their contract and pricing terms.
Akamai management is quite confident of sealing the deal and isn't discouraged by Apple's contemplation of handling content delivery alone. On the recent earnings conference call, Akamai CEO, Tom Leighton, stated: "Any very large media customer at one time or another is looking at a do-it-yourself solution. It's a lot harder than people think, though." Thanks to its diversified client base, Akamai remains unfazed by discussions around Apple building its own content delivery network.
Foolish takeaway
Akamai Technologies has a diversified business model and delivers cloud services to big players around the world. The company has some strong growth drivers in store, including the pending acquisition of Prolexic and increasing demand in key markets. With 15% annual growth in earnings expected over the next five years, Akamai looks like a good investment option.
