The Surprising Segment That Drove The Upside In Akamai's Q3 Beat

Shares of Akamai Technologies, Inc. AKAM were trading higher by more than 5 percent Wednesday after the company reported an impressive third quarter earnings report, turning some analysts incrementally bullish.

Deutsche Bank's Vijay Bhagavath maintains a Buy rating on Akamai's stock with a price target boosted from $68 to $75 after third-quarter numbers came in better than expected and fourth-quarter guidance was "better than feared." The results should signal to investors that the "Traffic Acceleration" the company highlighted in its media delivery business is "indicative of directional improvement" in media delivery fundamentals, Bhagavath said. (See Bhagavath's track record here.)

"This is especially significant as we head into 2018, with meaningful Internet Video Traffic Volumes like in Q1 from Winter Olympics, and in Q2 from World Cup Soccer," the analyst said. 

The improved fundamentals in media delivery traffic volumes should also be seen as a "positive acceptance" of the company's off-peak pricing strategy and management's dedication toward improving its competitive position, Bhagavath said. 

A now incrementally higher conviction on Akamai's media delivery fundamentals — coupled with a "reasonable" stock valuation at 7x EV/adjusted EBITDA — makes the stock attractive to investors at current levels, according to Deutsche Bank. 

JMP: Impressive Guidance

Akamai has earned itself a favorable reputation of beating consensus revenue expectations, partly due to conservative guidance, JMP Securities' Greg McDowell said in a Wednesday note. All of Akamai's guided metrics came in ahead of expectations, including revenue, EBITDA and EPS — despite the dilutive nature of the Nominum acquisition, McDowell said. (See McDowell's track record here.) 

Similar to Bhagavath, McDowell highlighted the strength in media revenue, which at $183 million came in "well above" the $165 million consensus estimate. Traffic growth at Akamai also accelerated to the highest level seen in two years at over 24 percent while video traffic grew at nearly double that rate.

JMP maintained an Outperform on Akamai and raised its price target from $64 to $70. 

Looking forward, Akamai is targeting a return to double-digit revenue growth and an EBITDA margin in the mid-30 percent range by the end of 2018.

JMP remains bullish on the stock for three reasons, McDowell said: Akamai remains a market share leader; management continues to take the right steps to diversify its business, creating a "more predictable" model for investors; and Akamai is positioned to take full advantage of the "burgeoning" over-the-top opportunity, which may even be stronger than investors appreciate.

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Photo courtesy of Akamai.