Cloud services and data-traffic management company Akamai Technologies (NASDAQ:AKAM) came out with terrific first-quarter results, beating analysts' estimates by a wide margin. Although Akamai's shares have been under pressure in the last three months due to speculation that Apple (NASDAQ:AAPL) will build its own content delivery network, or CDN, its recent results show that the company is well-positioned as a result of its diversified customer base.
Robust growth that looks set to continue
Akamai management believes that its customer diversification should help keep revenue and earnings growth intact if Apple stops using its services and build its own infrastructure. Driven by a diverse client base and strength in media-delivery services and security products, Akamai's revenue increased 23% to $454 million. Also, its non-GAAP net income rose 13% to $105 million, or $0.58 per share.
The company also successfully closed the Prolexic acquisition, a move that will boost Akamai's cloud-based network and data-center security solutions. Prolexic is known for its suite of distributed denial of service (DDoS) products.
Akamai's business grew 23% in the U.S. and 24% globally in the first quarter. Looking ahead, it expects strong demand for its hybrid cloud optimization capabilities, cloud infrastructure solutions, security, mobile products, and online video to continue driving growth.
The company expects strong growth in demand for its products and services in the Asia Pacific, Europe, the Middle East, and Africa. On top of this, Akamai is seeing growth in the reseller network, which contributed nearly 24% of the total revenue in the first quarter. Looking ahead, Akamai expects to gain more traction in the reseller channel as a result of Prolexic's strong channel partners. Akamai also has carrier partners that are gaining market share in the reseller category, and this should further boost the company's revenue from this segment going forward.
A diversified customer base
Looking forward, the growth of e-commerce, cyber security, IT outsourcing, and content-delivery should continue creating demand for its network and web performance solutions. Akamai has over 140,000 servers in 87 countries that provide CDN to various clients and customers, including Facebook, Apple, Nintendo, Comcast, and similar companies. As the demand for data is expected to grow going forward, these companies will deliver more content to users, benefiting Akamai in the process.
In addition, Akamai is also in partnership with Qualcomm (NASDAQ:QCOM) to deliver 4K video.
In November of last year, Qualcomm announced the Snapdragon 805 chip. This is expected to be Qualcomm's fastest chip with a clock speed of 2.5GHz, along with the latest Adreno 420 graphics module. The specialty of this chip is that it can process 4K or UltraHD video. As Qualcomm equips smartphones with this chip going forward, demand for 4K video could rise. As a result, Akamai should see a boost in content delivery going forward.
There are a few points of concern regarding Akamai that shouldn't be ignored. Intense competition has kept pricing under pressure, and this could be a significant headwind going forward. In order to differentiate its services, Akamai is significantly investing in research, along with the expansion of its sales force. Such moves could help Akamai ward off competition in the industry.
However, the possibility that Apple might build its own CDN is a concern for Akamai. According to StreamingMedia's Dan Rayburn, Apple is probably building its own CDN through which it will distribute apps, video, and software. So far, Apple has been paying Akamai for these services.
Akamai management believes that Apple will finally end up using its services for content delivery, however, since building infrastructure for this purpose is going to be a complex process. As such, it didn't come as a big surprise when Apple and Akamai finally ended up inking a deal, although the terms were not disclosed. Given Akamai's customer diversification, the company's business won't be thrown off gear even if Apple decides to move away in the future.
Akamai is coming off a solid quarter. Looking ahead, the company's business could improve further on the back of its Prolexic acquisition and the growing need for content-delivery across the world.
The company's valuation looks attractive, as it currently trades at a trailing P/E ratio of 32 and a forward P/E of 19. The big gap between the trailing and forward P/E ratios indicates that analysts are expecting robust growth in earnings. Yahoo! Finance suggests the same, with earnings expected to grow at a compounded annual growth rate of 15% for the next five years. After considering all these points, Akamai looks like a solid investment.
Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and 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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