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Amazon, Comcast Content Delivery Network Push Could Hurt Akamai

Comcast ( CMCSA ) and Amazon Web Services, part of Amazon.com ( AMZN ), are becoming bigger players in the content delivery network market, posing a challenge to CDN leader Akamai Technologies ( AKAM ), according to Goldman Sachs. CDNs increase the speed of e-commerce transactions, business software downloads and video streaming to mobile devices. “Amazon is growing its Cloudfront CDN to an estimated $1.8 billion in 2016 revenues and shifting its own video delivery from independent CDNs to its own network, and startups like Fastly are growing share,” Goldman Sachs analyst Heather Bellini said in a research report. AWS is part of the e-commerce giant’s fast-growing cloud computing business. Amazon stock surged to an all-time high  on Tuesday, as the Wall Street Journal reported that Salesforce.com ( CRM ) was building a new service that uses AWS. AWS was a big reason Amazon reported its highest sales growth in nearly four years when it posted first-quarter earnings on April 28, sending the stock up nearly 10% the following day. Amazon is an IBD Leaderboard stock, with a strong IBD Composite Rating of 95, where 99 is highest. Akamai has a 59 CR. Bellini, who has a sell rating on Akamai stock, attended the 2016 Content Delivery Summit in New York on Monday, gaining views on market trends. “A key takeaway was that the competitive landscape remains intense, as Comcast looks to triple its CDN capacity next year,” wrote Bellini. Comcast, the No. 1 cable TV company, has been expanding commercial services to businesses. Comcast  moved into CDN services in late 2014, Bellini noted. One market trend could work in Comcast’s favor, said the Goldman Sachs analyst. “Multi-CDN deployments were a key theme of the conference,” she wrote, “with new startups making it easy to route traffic across multiple CDNs.” Cambridge, Mass.-based Akamai is the No. 1 provider of CDN services. Worries that big customers such as  Apple ( AAPL ) and  Facebook ( FB ) are shifting more of their data traffic to their own CDNs have pressured Akamai stock. Aside from AWS and Comcast, Akamai competes with  Level 3 Communications ( LVLT ),  Limelight Networks ( LLNW ), and Verizon Communications ( VZ ), as well as startups Fastly and CloudFlare.

Akamai Revenue Guidance Light Amid Concern Over Apple, Facebook

Akamai Technologies ( AKAM ) late Tuesday reported Q1 earnings and revenue that topped expectations, though its current-quarter revenue guidance slightly missed Wall Street expectations. Still, Akamai stock was up 7.5% in early trading in the stock market today , touching a four-month high of 57.50. Cambridge, Mass.-based Akamai is the biggest provider of content delivery network (CDN) services. Worries that customers such as Apple ( AAPL ) and Facebook ( FB ) are shifting some of their data traffic to their own CDNs has pressured Akamai stock, and analysts have lowered Q1 estimates. Akamai said Q1 EPS ex items rose 8% to 66 cents per share, with revenue also rising 8% to $567.7 million. Analysts polled by Thomson Reuters had modeled 63 cents and $564 million. For Q2, Akamai forecasts revenue of $574 million at its midpoint of guidance and adjusted profit of 62 cents to 65 cents per share vs. consensus estimates of $578.4 million and 65 cents. “Revenue guidance is slightly under consensus, due to year-over-year decline in revenue from two major media delivery customers (Apple and Facebook) that are taking more of their volume in-house,” Michael Olson, a Piper Jaffray analyst, said in a research report. “Importantly, the impact from these customers is becoming less material as they go from 11% of revenue in 2015 to around 6% in 2016.” Colby Synesael, an analyst at Cowen & Co., says Akamai’s guidance might be too conservative. “While we appreciate management’s decision to err on the side of being overly cautious after its surprising revelation regarding these two customers on its Q3 (2015) call, it highlights management’s lack of visibility with its own top customers,” he said in a report. Akamai competes with  Level 3 Communications ( LVLT ) and  Limelight Networks ( LLNW ), as well as startups Fastly and CloudFlare.  Verizon Communications ( VZ ),  Amazon.com ‘s ( AMZN ) Amazon Web Services,   IBM ( IBM ) and  Comcast ( CMCSA )  are also emerging as new rivals in some parts of the CDN market. “Akamai has been very clear that the first half of 2016 would be marked by slower growth in the media segment, but then it expects (Internet TV) video to begin to accelerate growth. Similar to other large, secular growth opportunities, it is often difficult to project the exact timing of the opportunity, but we believe growth from (Internet TV) will begin to manifest in second half 2016,” said Michael Bowen, an analyst at Pacific Crest Securities, in a report.

Akamai Q1: Media Revenue Seen Down But Security Services Up

Akamai Technologies ‘ ( AKAM ) revenue from media and entertainment customers such as Apple ( AAPL ) and Facebook ( FB ) is expected to fall in Q1, but analysts expect a boost from the Internet infrastructure company’s move into security services. Cambridge, Mass.-based Akamai, the biggest provider of content delivery network services, is set to report Q1 earnings after the close Tuesday. Akamai’s global CDN helps Apple, Facebook and other speed up video streaming, e-commerce transactions and business software downloads over the Internet. Apple, though, is among the big tech companies that has been developing its own CDN, while also using other CDN providers. Mark Mahaney, analyst at RBC Capital , is modelling a 3.5% year-over-year decline in sales for Akamai’s media and entertainment business but a 15% rise in cloud-security revenue. “We are looking for $207 million, or a 3.5%  (media segment) decline, as two of the company’s largest media customers (likely Apple, Facebook) transition off the Akamai platform. The concern over whether additional top media customers will migrate off Akamai remains the most material overhang on the stock,” Mahaney said in a research report. “Security is becoming an increasingly meaningful part of the financial story, accounting for 12% of revenue in 2015. We are modeling 45% year-over-year growth to $79.8 million.” Akamai competes with  Level 3 Communications ( LVLT ), and Limelight Networks ( LLNW ) as well as startups Fastly and CloudFlare. Verizon Communications ( VZ ) ( IBD ), Amazon.com ‘s ( AMZN ) Amazon Web Services,   IBM ( IBM ) and Comcast ( CMCSA ) also are emerging as new rivals in some parts of the CDN market. Analysts polled by Thomson Reuters estimate Q1 EPS of $564 million, up 7% from the year-earlier period. Analysts estimate earnings per share minus items of 63 cents, up 3%. Akamai stock is about even in 2016 but down 32% over the past 12 months. Akamai has a low IBD Composite Rating of 50 out of a possible 99. Akamai stock was down a fraction, near 51, in early trading in the stock market today .