What a time it’s been for Akamai. In the past six months alone, the company’s stock price has increased by a massive 45.5%, reaching $128.24 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Akamai, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Akamai Will Underperform?
Despite the momentum, we don’t have much confidence in Akamai. Here are three reasons why AKAM doesn’t excite us, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Akamai’s billings came in at $1.13 billion in Q1, and over the last four quarters, its year-on-year growth averaged 6.8%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Akamai, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Akamai’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 58.3% gross margin over the last year. That means Akamai paid its providers a lot of money ($41.72 for every $100 in revenue) to run its business.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Akamai has seen gross margins decline by 2 percentage points over the last 2 years, which is poor compared to software peers.
3. Cash Flow Margin Set to Decline
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Akamai will flip from cash-producing to cash-burning. Their consensus estimates imply its free cash flow margin of 17.9% for the last 12 months will decrease to negative 4.7%.
Final Judgment
Akamai falls short of our quality standards. After the recent surge, the stock trades at 3.7× forward price-to-sales (or $128.24 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Akamai
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