Akamai Reports Decent Q4, but 2023 Outlook Dims

No-moat Akamai AKAM easily beat FactSet consensus revenue and EBITDA estimates in its fourth quarter, but its underlying business did not look particularly good. The financial outperformance was mostly due to a lower currency headwind than management previously anticipated. The firm’s security business, which has driven growth, has slowed significantly. Financial results should deteriorate further in 2023, as management guided to even slower revenue growth and outlined plans to invest very heavily in building out its cloud computing business. We are maintaining our $85 fair value estimate and believe the stock is fairly valued.

In constant currency, fourth-quarter revenue grew 6% year over year, but we estimate a nearly 5-percentage-point boost from the acquisitions of Guardicore in the fourth quarter of 2021 and Linode in the first quarter of 2022. The revenue trajectory in the firm’s legacy content delivery network remains very weak—down 8% in constant currency in both the fourth quarter and the full year. We attribute the weakness mostly to deflationary pricing, so we don’t expect much improvement in the rate of decline even as traffic grows.

Security revenue has saved Akamai for several years, but its growth has now slowed significantly, and management sounds more excited about growing the nascent cloud edge computing business. In constant currency, security revenue grew 14% year over year, well below the 20% annual growth that management has targeted for years. Akamai expects only low-double-digit security growth in 2023. With security revenue exceeding $1.5 billion in 2022—making it larger than most cybersecurity companies—we expect this lower level of growth will be permanent. With a slowdown in what has been the firm’s growth engine, management discussed redeploying resources within its security business and focusing more on cloud computing. This should bring more uncertainty and higher costs compared with the path Akamai has been on the last few years.