Shares of Akamai Technologies Inc. AKAM fell 4.59% to close at $60.53 on Mar 28, following the news that the recently announced acquisition of SOASTA will be dilutive to 2017 adjusted earnings per share (EPS).
Akamai expects the acquisition to have 6–7 cents negative impact on the bottom line. Notably, the company had reported EPS (including stock-based compensation) of $2.01 in 2016, which increased 2% over 2015. Currently, the Zacks Consensus Estimate is pegged at $2.21.
Akamai shares have been on a path of decline since the announcement of fourth-quarter full-year 2016 results on Feb 7, when management’s near-term guidance rattled investors. Margins are expected to remain under pressure due to continuing investments on new growth avenues like Enterprise Solution portfolio.
Further, faster increase in capital expenditure and increasing headcount investment will keep margins under pressure in 2017.
Akamai Technologies, Inc. Price and Consensus
Akamai Technologies, Inc. Price and Consensus | Akamai Technologies, Inc. Quote
Moreover, per CNBC which quoted Akamai CFO Jim Benson, EBITDA margin target will remain in the 37–39% range for a longer period (another one or two year) than previously projected. Notably, EBITDA margin was 40% in fourth-quarter 2016.
We believe that the dilutive acquisition and pressed margins will remain an overhang on the stock at least in the near term. Notably, Akamai shares have declined 9.2% year to date, compared with the Zacks Internet Services industry’s gain of 9.6%.
SOASTA – A Good Addition to Portfolio
Mountain-view based SOASTA offers cloud-based application testing and performance analytics software. According to Akamai management, “the addition of SOASTA's technology is intended to give our customers new ways to measure, optimize and validate the business impact of their web performance strategies.” The acquisition is anticipated to close early in second-quarter 2017.
Reportedly, SOASTA raised $30 million in debt financing in Mar 2016 and about $75 million in total since its inception in 2006. The company has a strong clientele that includes the likes of Intuit, Microsoft and Activision ATVI, a Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy)stocks here.
We believe that SOASTA is a good addition to Akamai’s portfolio given the growth opportunities in the performance analytics market, which is estimated to grow at a CAGR of 18.7% over 2016-2021 time frame, according to MarketsAndMarkets. Although SOASTA will be dilutive to 2017 earnings, it is expected to be accretive from 2018.
Akamai is well-positioned to benefit from the rising demand for cloud infrastructure solutions, security, mobile products and online video. Also, it is likely to gain from strong foothold in the web applications domain. New products like Enterprise Application Access (EAA) and the Enterprise Threat Protector (ETP) service will expand customer base going ahead.
However, DIY initiatives by the large Internet companies Amazon.com, Apple AAPL, Facebook FB, Google, Microsoft, and Netflix remain a concern for the company’s media delivery business.
Also, recently launched products like Bot Manager and Image Manager will take some time to fully penetrate the market. Hence, we don’t expect revenue growth to accelerate at least in the near term.
Currently, Akamai carries a Zacks Rank #4 (Sell).
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