Akamai Earnings: Growth Businesses Are Crushing It and Demand Should Remain High

Akamai’s AKAM third-quarter results support the successful transformation the firm has made to overcome the perpetually declining content delivery business it was built upon. Total sales and profits exceeded the company’s third-quarter guidance on accelerating growth in security and compute, and guidance implies security and compute growth rates will remain elevated. We’re increasing our growth projections and raising our fair value estimate to $95 from $90.

Excluding $10 million in nonrecurring licensing and acquisition-related revenue, we estimate sales grew 8% year over year. Margins expanded significantly, with the adjusted operating margin exceeding 30% for the first time since 2021 and expanding more than three full percentage points from the same period last year. With security revenue now making up almost half of total sales and delivery comprising only 40%, we expect sales growth to accelerate from the roughly 6% we project for 2023. We also believe margins can continue expanding, as Akamai is seeing the benefits from the capital spending it did to enable its compute business. With the capacity it built, Akamai has been able to move some of its cloud spending in-house. Management said it is still in the early innings of a shift that should result in $100 million in annual savings, which currently equates to about 250 basis points of EBITDA margin.

Security revenue was up 19% year over year in constant currency, including the 1.5% tailwind from the licensing revenue. Management called out Guardicore, which fights malware and ransomware attacks, as an especially strong contributor. Guardicore, which Akamai acquired in 2021, is still mostly selling to new customers as opposed to legacy CDN customers, leaving room for further penetration. More importantly, we believe the success shows the growing importance of Akamai’s security offerings, whether standalone or in conjunction with CDN services, as cybersecurity threats to enterprises continue growing.