Story Stocks^®

Akamai Tech (AKAM) has made significant progress in transforming into a cybersecurity and cloud computing company, but its traditional CDN (content delivery network) business is still mired in a deep slump that continues to offset the strength of those two businesses. That persistent weakness in the Delivery segment, which is being weighed down by slowing digital spending and internet traffic, is the primary cause behind AKAM's downside EPS and revenue guidance for 1Q25 and FY25.

• AKAM did manage to surpass Q4 EPS and revenue estimates, but it's worth noting that the company did reset Q4 expectations lower last quarter when it issued downside guidance in the Q3 earnings press release. Strength in the Compute segment, which generated yr/yr revenue growth of 24% to $167 mln, was a key factor behind the upside Q4 results. In particular, cloud infrastructure saw healthy demand, especially among larger enterprises. In fact, at year end, about 300 enterprise customers were spending at least $100K in ARR for cloud infrastructure services.
• Moving forward, AKAM anticipates that the cloud infrastructure business -- which provides a competitively priced edge computing network -- will have an even larger impact on its growth. For the remainder of FY25, the company is now aiming to grow total cloud infrastructure services ARR by 40-45%, driven primarily by enterprise customers.
• Meanwhile, in the highly competitive cybersecurity space, AKAM is expanding its capabilities in order to better compete against companies like CrowdStrike (CRWD) and Palo Alto Networks (PANW). In Q4, Security revenue increased by 14% to $535 mln, matching last quarter's growth rate, as AKAM's broader product portfolio has enabled it to expand its customer base. For example, after initially entering the cybersecurity market with DDoS mitigation and web firewall products, AKAM now has products that also protect infrastructure, APIs, and applications.
• Similar to Compute, AKAM is banking on Security's momentum continuing in FY25 and beyond, anchored by its Guardicore platform, which ended FY24 with an ARR of $190 mln, up 31% on a yr/yr basis. Company-wide, AKAM announced a new 3–5-year goal that includes inorganic revenue growth of over 10%, fueled by the Compute and Security segments.
• That seems like a tall task, though, when considering the ongoing weakness in the Delivery business. Following last quarter's 16% decline, revenue in Delivery fell by 18% in Q4 to $318 mln. In addition to the macro-related headwinds mentioned above, AKAM is contending with a significant drop in revenue from one of its largest customers. During the earnings call, the company noted that this customer is navigating "political challenges" in the U.S. and is pursuing a DIY strategy. This factor will produce a headwind of about 1-2% per year on AKAM's overall revenue growth for the next couple of years.

Overall, the story remains mostly the same for AKAM. While the company continues to make good progress shifting its revenue towards Security and Compute -- which now account for 69% of total revenue -- the lingering issues in Delivery continue to act as an albatross on its financials. Until that situation improves, the stock will likely have a difficult time finding any sustained upward momentum.