Akamai Technologies is making a bet that it can compete head-to-head with the giant in the cloud computing market, and investors are not sure they like the idea.
Akamai (ticker: AKAM) posted fourth-quarter results late Tuesday, and the stock inched higher after hours. But the company’s guidance for both the quarter and the full year fell a little short of Wall Street estimates, and analyst reaction to the quarter was chilly.
The decline has less to do with the results than the company’s shifting business priorities. Akamai has three primary businesses. It was a pioneer in content delivery networks, which websites use to improve their performance. It provides security software, in a natural extension of that CDN business. And starting with the company’s $900 million acquisition of Linode in March 2022, Akamai expanded into the vast but hypercompetitive cloud computing market.
Now Akamai is going all in on the cloud—CEO Tom Leighton told Barron’s in an interview on Tuesday that he thinks the cloud business will eventually account for the majority of Akamai’s revenue.
There were a few other issues with the report. While content delivery network revenue was better-than-expected in the quarter, for instance, security software revenue missed estimates, and Wall Street analysts were also overly optimistic about the growth of the security business for the full year.
But the big issue is that Akamai is going to boost capital spending substantially to build out its cloud arm. Earlier on Tuesday, the company unveiled the Akamai Connected Cloud, along with plans to sharply increase its roster of cloud computing sites in 2023. Guggenheim analyst Ramond McDonnough, who maintains a Sell rating on the stock with a $75 target price, points out that Akamai expects heavy capital spending this year as a percentage of revenue—21%, compared with the Wall Street consensus forecast of 14%.
RBC Capital analyst Rishi Jaluria responded to the report by cutting his rating on the stock to Sector Perform from Outperform, while chopping his target price to $85, from $100. “The major story of the earnings call…was the clear change in strategy in going all-in” on cloud computing, he wrote. “We shift to the sidelines as we believe this move alters the risk-reward profile, and we would wait for evidence it can pay off before getting back involved.”
Among other concerns, Jaluria notes that Akamai seems intent on competing with the large cloud players—Amazon’s (AMZN) AWS, Microsoft’s (MSFT) Azure, and Alphabet’s (GOOGL) Google Cloud—on price. “If Akamai is successful, hyperscale cloud vendors can cut prices themselves,” he writes.
Needham analyst Alex Henderson, who maintains his Hold rating on Akamai shares, thinks investors will view the company’s shift in focus to cloud computing from security as a “lower visibility strategy,” which will involve a multiyear transition, starting with an intense investment phase.
Akamai shares on Wednesday are down 9.8%, to $79.18, making it the second worst performer in the S&P 500 on the day, behind Devon Energy (DVN).
Write to Eric J. Savitz at [email protected]