Akamai (AKAM)

Web content delivery and security company Akamai (NASDAQ:AKAM) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 2.9% year on year to $1.02 billion. The company expects next quarter’s revenue to be around $1.02 billion, coming in 1.1% above analysts’ estimates. Its non-GAAP profit of $1.70 per share was 8.6% above analysts’ consensus estimates.

Company Overview

Founded in 1999 by two engineers from MIT, Akamai (NASDAQ:AKAM) provides software for organizations to efficiently deliver web content to their customers.

The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Akamai grew its sales at a weak 4.5% compounded annual growth rate. This fell short of our benchmark for the software sector and is a rough starting point for our analysis.

This quarter, Akamai grew its revenue by 2.9% year on year, and its $1.02 billion of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 4.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3.2% over the next 12 months, similar to its three-year rate. This projection is underwhelming and suggests its products and services will face some demand challenges.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Akamai’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Akamai’s products and its peers.

For software companies like Akamai, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Akamai’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 59.1% gross margin over the last year. That means Akamai paid its providers a lot of money ($40.93 for every $100 in revenue) to run its business.

Akamai’s gross profit margin came in at 58.7% this quarter, marking a 1.3 percentage point decrease from 60% in the same quarter last year. Akamai’s full-year margin has also been trending down over the past 12 months, decreasing by 1.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Akamai has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 13%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Akamai’s operating margin decreased by 4.5 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Akamai generated an operating profit margin of 15.2%, down 1.7 percentage points year on year. Since Akamai’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Akamai has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 17.7% over the last year, better than the broader software sector.

Akamai’s free cash flow clocked in at $55.19 million in Q1, equivalent to a 5.4% margin. The company’s cash profitability regressed as it was 12.6 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Akamai’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 17.7% for the last 12 months will increase to 19.2%, giving it more flexibility for investments, share buybacks, and dividends.

Akamai reported $1.32 billion of cash and $4.62 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.71 billion of EBITDA over the last 12 months, we view Akamai’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $58.89 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Akamai beat analysts’ EBITDA expectations this quarter. We were also glad its EPS guidance for next quarter exceeded Wall Street’s estimates. On the other hand, revenue was just in line. Overall, this print had some key positives. The market seemed to be hoping for more, and the stock traded down 1.4% to $84.35 immediately after reporting.

Updated: May 10, 2025 at 10:03 PM EDT

Before deciding whether to buy Akamai or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We cheer for all companies solving complex business issues, but in the case of Akamai, we’ll be cheering from the sidelines. To begin with, its revenue growth was weak over the last three years, and analysts don’t see anything changing over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its customer acquisition is less efficient than many comparable companies. On top of that, its gross margins show its business model is much less lucrative than other companies.

Akamai’s price-to-sales ratio based on the next 12 months is 2.8x. This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $102.22 on the company (compared to the current share price of $76.60).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.