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An activist investor campaign that's targeting margin expansion at Akamai Technologies, Inc. (NASDAQ: AKAM) led KeyBanc Capital Markets to drop its bearish stance on the cloud services company.
The Analyst
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KeyBanc's Brandon Nispel upgraded Akamai Technologies' stock from Underweight to Sector Weight with no assigned price target.
The Thesis
Akamai's margins are set to expand and become a focal point for investors, unlike a revenue growth story that investors "used to care about," Nispel said in a Wednesday note.
Akamai is working with activist investor Elliott Management to improve its non-GAAP operating margins to 30 percent in 2020 versus a prior goal in the high 20s.
Akamai's margin expansion is likely to mostly come from G&A efficiencies, as G&A expense as a percentage of revenue should lower from 15 percent in 2017 to 10 percent in 2020, the analyst said. The company can likely achieve this objective through payroll-related spend, facility spending for employees and professional fees from legal and other areas, Nispel said.
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Over the coming years, Akamai needs to ramp its sales and marketing efforts to fully target the enterprise security space, the analyst said. The high level of competition — coupled with the larger costs of operating in the enterprise security space — likely implies the company "does not have the potential" to see any operating efficiencies through S&M and R&D, Nispel said.
Longer-term margin recovery beyond 2020 may not prove to be sustainable due to competitive factors and the "sheer size" of Akamai's network, which will likely limit any sustainable margin recovery, according to KeyBanc.
Price Action
Shares of Akamai Technologies were trading higher by 1.6 percent early Thursday morning.
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Photo courtesy of Akamai.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.