Part 1, What’s Next for Akamai

Akamai had a phenomenal Q1, reporting 23% growth and revenues of $454M. It’s phenomenal in the sense that Akamai grew revenue by this much being a CDN in the CDN industry, where the industry is small, established, has a little more than a dozen players, and has grown year-over-year in the mid-teen percentiles. Akamai has defied expectations. If they grow 2013 revenues of $1.579B by 23%, they should reach $1.94B in 2014. Akamai has a revenue milestone of $5B by 2020, which means they must triple 2013 revenues. If Akamai grows 23% over the next 5 years they will definitely surpass the milestone. Can they grow this fast? Yes, but they’re going to have to take a radical approach of shaking things up.

Now back with reality. Q1 is now history, and so is the Prolexic acquisition. The next major goal for Akamai is to meet and/or exceed quarterly earnings per share (EPS) for Q2. If it misses EPS by a penny or more, the results are likely to be catastrophic. Akamai needs to look no further than Imperva and FireEye. Their earnings were not as expected, and the next thing you know they both shed more than half their market cap. Wall Street is brutal and unreasonable at times, and if Akamai misses EPS by a penny or two, investors may wipe out $3B in market cap. Wall Street hates negative surprises. What can Akamai do to blow past yearly revenue expectations, maybe this year, but certainly next, and also reach the $5B milestone by 2020?

Akamai’s Next Step

Akamai has a billion dollars in cash on its balance sheet. If Akamai and Limelight Networks has anything in common it’s this; Akamai has to put some of that cash to use immediately. The longer they wait, the more difficult it’s going to be to exceed EPS, and revenue projections for the next few years. Now that we’ve studied Akamai and the CDN ecosystem extensively for the last few months, how can they accomplish this feat? Akamai needs to make multiple acquisitions to round out its product line, and grow into non-CDN sectors offering services that leverage its global infrastructure. Even if Akamai decided to stop catering to new customers, and instead only catered to its existing customer’s base, it could still reach $5B in annual revenues. How? It’s in the numbers.

The Akamai Math: Annual Revenue / No of Customers
  • $1.579B / Fortune 1000 = $1.579M per Customer/Annually
  • $1.579B / 5,000 Customers = $315,800 per Customer/Annually

It’s safe to say that Akamai probably has 100% of the Fortune 1000 as customers, or very close. If we take 2013 annual revenue and divide that by the Fortune 1000, we get $1.579M/year/customer, or $131k/monthly per customer. Thus, if Akamai can go deep and wide into the Fortune 1000, and capture more of the IT spend to the tune of 3x what it is right now, they can reach the 2020 milestone. There is another way to also look at it. Akamai has about 5,000 customers, (guesstimate); if we apply the same formula we get $315k/annually/customer/ or $26k/month/customer.

Conclusion: There is definitely a market there for Akamai to sell $5B worth of services to, and as we all know in the industry, Akamai is a premium service that charges premium rates; every one of their customers are enterprises with money to spend, or else they wouldn’t be using Akamai. Enterprises spend 2% to 5% of their annual revenues on IT, for some of Fortune 1000, that amounts to more than $100M annually. The money is there, all Akamai needs is a bigger and more feature rich product line. continued in Part 2  (Part 1, What’s Next for Akamai)