AKAM Stock Study (7-5-23)

I recently did a stock study on Akamai Technologies, Inc. (AKAM) with a closing price of $91.32.

M* writes:

     > Akamai operates a content delivery network, or CDN, which entails
     > locating servers at the edges of networks so its customers, which
     > store content on Akamai servers, can reach their own customers
     > faster, more securely, and with better quality. Akamai has over
     > 325,000 servers distributed over 4,100 points of presence in more
     > than 1,000 cities worldwide. Its customers generally include
     > media companies, which stream video content or make video
     > games available for download, and other enterprises that run
     > interactive or high-traffic websites, such as e-commerce firms and
     > financial institutions. Akamai also has a significant security
     > business, which is integrated with its core delivery and
     > computing businesses to protect customers from cyberthreats.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 8.9% and 10.6%, respectively. While sales have been up and straight, EPS declines in ’15, ’17, and ’22 make the graph look somewhat cyclical. Normalized EPS is a bit more straight. PTPM leads peers and trails the industry as it trends down from 26.6% in ’13 to 18.2% in ’22 with a last-5-year mean of 17.9%.

Also over the past decade, ROE leads peers and trails the industry while trending sideways from 11.3% in ’13 to 12.1% in ’22 with a last-5-year mean of 12.3%. Debt-to-Capital is lower than peer and industry averages despite trending higher from 0% in ’13 to 42.1% in ’22 with a last-5-year mean of 39.1%.

Interest Coverage is 58.4 and Quick Ratio is 1.7. M* gives an Exemplary rating for Capital Allocation and Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 5.6% YOY and 5.4% per year for ’23 and ’22-’24 (based on 15 analysts).
• YF projects YOY 4.0% and 6.1% for ’23 and ’24, respectively (19 analysts).
• Zacks projects YOY 4.1% and 6.3% growth for ’23 and ’24, respectively (8).
• Value Line projects 3.8% annualized growth from ’22-’27.
• CFRA projects 4.4% YOY and 5.3% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 4.7% per year along with a 5-year annualized projection of 5.0% (analyst note).

I am forecasting near the bottom of the range at 4.0%.

With regard to EPS growth:

• CNN Business projects 7.1% YOY and 8.1% per year for ’23 and ’22-’24, respectively (based on 15 analysts), along with 5-year annualized growth of 9.0%.
• MarketWatch projects 9.2% growth per year for both ’22-’24 and ’22-’25 (21 analysts).
• Nasdaq.com projects 9.3% YOY and 9.9% per year for ’24 and ’23-’25 (9, 9, and 4 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 9.0%.
• YF projects YOY 7.1% and 9.6% for ’23 and ’24, respectively (18), along with 5-year annualized growth of 8.0%.
• Zacks projects YOY 7.5% and 8.5% for ’23 and ’24, respectively (9), along with 5-year annualized growth of 10.0%.
• Value Line projects 7.8% annualized growth from ’22-’27.
• CFRA projects 6.7% YOY and 8.1% per year for ’23 and ’22-’24 along with a 3-year CAGR of 9.0%.
• M* projects long-term annualized growth of 11.3%.

The mean of six long-term estimates is 9.2% per year. I am forecasting below the range at 7.0%. I will use ’23 Q1 EPS of $2.86/share (annualized) as the initial value rather than ’22 EPS of $3.26.

My Forecast High P/E is 30.0. Over the past decade, high P/E has ranged from 31.8 (’21) to 56.9 (’17) with a last-5-year mean of 36.9. The last-5-year-mean average P/E is 30.7. I am forecasting below the range.

My Forecast Low P/E is 22.0. Over the past decade, low P/E has ranged from 19.7 (’19) to 35.4 (’17) with a last-5-year mean of 24.4. I am forecasting toward the lower end of the range [only ’19 and ’13 (20.3) are lower].

My Low Stock Price Forecast (LSPF) is the default value $62.90 based on $2.86/share initial value. This is 31.1% less than the previous closing price and 11.0% less than the 52-week low.

These inputs land AKAM in the HOLD zone with a U/D ratio of 1.0. Total Annualized Return (TAR) is 5.7%.

PAR (using Forecast Average—not High—P/E) is less than the current yield on T-bills at 2.7%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 85 studies over the past 90 days (my study along with 16 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 7.2%, 9.0%, 34.2, and 23.8, respectively. I am lower across the board. Value Line projects an average annual P/E of 34.0, which is higher than MS (29.0) and much higher than mine (26.0).

MS high/low EPS is $4.80/$2.97 vs. my $4.01/$2.86 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $69.40 implies a Forecast Low P/E of 23.4, which is close to the above-stated 23.8. MS LSPF remains 10.3% higher than mine, which lends itself to more aggressive zoning.

MOS seems robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two valuation metrics I have recently begun to monitor. Zacks reports PEG of 1.58: just above the upside threshold of 1.50. Relative Value (M* data) is 1.04. Both suggest the stock to be slightly overvalued.

I am also just starting to familiarize myself with Kim Butcher’s “quick and dirty DCF.” According to this method, the stock should be valued at 20 * ($9.25 – [0 + $2.75)] = $130.00 (i.e. stock undervalued by 30%).

I would look to re-evaluate AKAM under $77/share.