by Paul Kushner
June 25, 2001
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Since it was founded in August 1998, Akamai has revolutionized the way in which content is delivered on the Internet. And while this is important now, the implications of Akamai’s services will be truly apparent in the not-too-distant future when broadband is everywhere. Akamai calls its content delivery platform “EdgeAdvantage” — a collection of Akamai's network that includes 9,700 servers within 650 networks in more than 56 countries. Essentially, the network allows content providers to put content closer to the edge of the Web, where it is delivered faster and with less network congestion. Akamai says it has over 1,400 companies worldwide as customers, including big names like Yahoo!, Apple and Morgan Stanley Dean Witter.
The Financial Picture:
Akamai currently has a market cap of $742.8 million with 109.1 million shares outstanding and a 39.3 million share float. It is a company built upon the premise that the humongous upfront costs to build out its global server network will eventually be paid off and justly rewarded years later especially as broadband usage and streaming media takeoff. The company is expected to have $176 million in revenues this year and $290 million in revenues next year. As can be seen by those numbers, revenue growth is extremely healthy; the problem is profitability.
Even with these impressive figures, revenues will not be seen for many years. Goldman Sachs analyst Matthew Janiga, gave Akamai a “Market Outperform” rating. Further, Janiga feels that the near-term will be challenging for Akamai but says it is clearly the leader in the critical and growing content delivery market. He predicts Akamai will post a second quarter loss of 48 cents a share, a $1.80 loss for 2001 and 97 cents a share loss for 2002. That rough near-term outlook was confirmed to me by a source at a recent industry insider event. I was told that Akamai was under such pressure to sell its services in this tight market that it was even willing to slash its listed rates for startups with no negotiating clout.
Pricing pressures, though, are not exclusive to Akamai. All of its competitors are facing the same problem. And Akamai has a lot of competitors. iBEAM (IBEM), Digital Island (ISLD), Xcelera’s Mirror Image Internet (XLA), CacheFlow (CFLO) and Inktomi (INKT) all compete with Akamai in some manner, although none really measure up or represent true competition, in my opinion.
Recent Developments:
Just this past week during Streaming Media West 2001, Akamai announced a slew of new deals that exhibit its keen interest in the enterprise market. The Akamai enterprise streaming system, Akamai Forum — is now being used by Charles Schwab, John Hancock Funds and Unisys Corporation.
Mike Quinn, general manager of enterprise CDN services for Akamai, said in a statement: “Streaming media greatly enhances a corporation's ability to reach and interact with unlimited numbers of customers, prospects, and their own employees in a timely cost-effective manner.”
Quinn is correct in saying that streaming is an incredible cost saver for large financial institutions. The ability to communicate in an effective manner without traveling will continue to drive demand for streaming enterprise services. Even as corporate spending slows, these types of expenditures will continue to grow. Another big announcement last week was the deal with Generic Media, which will now allow customers access to Akamai's CDN services.
Final Word:
These days, just uttering the word infrastructure turns investors nauseous. And who can blame them, considering the performance of most of the companies in the sector? The cutbacks in spending and the fall of many dot-coms have lead to a dire situation. But it’s a situation that will only be temporary for Akamai. Market research shows that the content delivery space will grow to a multi-billion dollar industry within the next five years, and Akamai is one of the few companies properly poised to exploit it.
Additionally, a report released by the Yankee Group last week points toward the tremendous growth potential in streaming media advertising, or what the report calls “on-demand marketing.” Targeted streaming ads will grow to become a $3.1 billion market by 2005, up from $44 million last year. Yankee Group analyst Steven Vonder Haar thinks Akamai is one of the companies that will be able to directly benefit from this growth.
Putting all of this together will be important for Akamai, and that rests on one thing: the management team. The top two executives — chairman and chief executive officer George Conrades and president Paul Sagan — are highly regarded by the financial world. Goldman Sachs analyst Janiga recently said that the two execs form one of the best teams in the industry and could eventually steer the company to profitability. In short, Akamai has many things going for it and should eventually become a very profitable company.
