Time To Buy Akamai Stock?

Up 30% from its low in March, we believe Akamai stock (NASDAQ: AKAM) has room for around 15% upside to levels it reached in September 2020. The company’s stock trades at $104 currently and is, in fact, up just around 20% so far this year. Further, it traded at $102 in February 2020 – just before the outbreak of coronavirus – and is currently only 2% above that level, as well. Also, with the rise in online activity, the need for web server space will rise, leading to a surge in demand for Akamai’s services. We believe that the stock has the potential to gain around 15% from its current levels, on the back of steady demand growth and strong Q3 2020 results. Our conclusion is based on our comparative analysis of AKAM stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 67% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how AKAM stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

AKAM and S&P 500 Performance Over 2007-08 Financial Crisis

We see AKAM stock declined from levels of around $22 in September 2008 (pre-crisis peak) to levels of around $18 in March 2009 (as the markets bottomed out), implying AKAM stock lost around 20% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of just above $25 in early 2010, rising by around 40% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

AKAM Fundamentals Over Recent Years

AKAM revenues increased from $2.2 billion in 2015 to $2.9 billion in 2019, due to higher revenues across all revenue segments. Along with higher revenue, earnings also jumped, with EPS rising from $1.80 to $2.94 during this period.

Does AKAM Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Akamai’s total debt rose from $600 million in 2016 to $1.8 billion in 2019, while its total cash jumped from around $800 million to $1.5 billion over the same period. Further, the company generated around $1.1 billion cash from operations in fiscal 2019. This steady cash position combined with strong cash from operations provides the company a reasonable cushion to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we see the rise in online activity continuing, driving up the need for more server space. This is evident from Akamai’s Q3 2020 results, where revenues jumped to $793 million from $710 million for the same period last year. This also boosted EPS to $0.97 from $0.85. We believe that Akamai stock has potential upside in the near term, and even as the lockdowns are gradually lifted, a drop in web server demand does not seem very likely. This could see Akamai stock potentially rise around 15% from its current level.

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