KeyBanc Upgrades Akamai Technologies As Focus Turns To Margin Expansion

An activist investor campaign that's targeting margin expansion at Akamai Technologies, Inc. AKAM led KeyBanc Capital Markets to drop its bearish stance on the cloud services company. 

The Analyst

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. 

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.

Related Links:

Akamai Follows Activist Shareholder's Advice, Triggering JPMorgan Upgrade

KeyBanc: Despite Activist Involvement, An Akamai Takeover Is Unlikely

Photo courtesy of Akamai. 

Posted In: activist investorBrandon NispelElliott ManagementKeyBanc Capital MarketsTechnologyAnalyst ColorUpgradesAnalyst Ratings