Ignore Collapsing CDN Pricing, Akamai (AKAM) Will Surge Because of Cost Advantages

If you want 60%+ returns, FBR thinks you should buy Akamai (AKAM). The firm believes the content delivery network (CDN) AKAM is well-positioned not because of its premium pricing (which most analysts focus on), but because of its cost advantages.

Specifically, FBR expects AKAM’s gross margin declines to moderate due to:

  • expectations of a continued rapid decline of IP transit prices and increased proportion of direct peering (these trends benefit AKAM since (1) IP transit makes up a large portion of cost of goods sold and (2) AKAM’s premium content will attract direct peering relationships)
  • AKAM offers a compelling value proposition to networks that can result in settlement-free peering and/or free or below-market IP transit pricing and co-location
  • decelerating rate of decline in video delivery prices
  • belief that AKAM’s higher margin value-added services will make up a larger share of revenues going forward
  • continued strength in eCommerce

Importantly, FBR does not think AKAM’s gross margin declines with reverse, just slow. We can’t recall seeing a stock jump 60% while margins were dropping, but we”ll take FBR’s word for it.

FBR reiterates OUTPERFORM on Akamai (AKAM), target price $60.

See Also:
Limelight’s Crazy Week Begins: Stock Soars 13% Ahead Of Patent Hearing (LLNW, AKAM)

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