Akamai Technologies, Inc. (AKAM) provides cloud services for securing, delivering, and optimizing content and business applications over the internet internationally. The Cambridge, Mass.-based company offers cloud and enterprise security solutions. In comparison, Cloudflare, Inc. (NET) in San Francisco operates a cloud platform that delivers a range of network services to businesses worldwide. The company provides an integrated cloud-based security solution to secure a range of media combinations.
A content delivery network (CDN) is a group of geographically distributed servers that accelerate web content delivery by bringing it closer to the user location. Amid the strict social distancing phase of the COVID-19 pandemic, high-speed data networks were in high demand as people spent most of their time indoors and relied on smart gadgets for their work. This trend is expected to continue in the near term due to the accelerated pace of digitization and increasing adoption of the internet of things (IoT). According to a report by A2Z Market Research, the global content delivery network services market is expected to grow at a 14% CAGR by 2028. Therefore, both AKAM and NET should benefit.
NET has gained 36.5% in price over the past year, while AKAM has returned 6.1%. Also, NET’s 11.7% gains over the past month compare with AKAM’s negative returns. Also, NET is the clear winner with 54.9% price gains versus AKAM’s negative returns in terms of the past nine months’ performance.
But which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On Feb. 16, 2022, Dr. Tom Leighton, CEO of AKAM, said, "We believe our planned acquisition of Linode in cloud computing, and our recent acquisition of Guardicore in enterprise security, combined with our robust product portfolios, enterprise-focused go-to-market capabilities, and widely distributed edge platform, will uniquely position us for success in these two large and fast-growing markets."
On Feb. 11, 2022, NET announced that it had acquired Vectrix, which provides businesses with one-click visibility and control across all their SaaS applications. The acquisition adds modern cloud access security broker functionality to the company’s industry leading Zero Trust platform, which could further increase its demand.
Recent Financial Results
AKAM’s revenue increased 7% year-over-year to $846 million for its fiscal fourth quarter, ended Dec. 31, 2021. The company’s adjusted EBITDA grew 11% year-over-year to $404 million, while its non-GAAP net income was $243 million representing an 11% year-over-year increase. Also, its non-GAAP EPS came in at $1.49, up 12% year-over-year.
NET’s revenue increased 54% year-over-year to $193.60 million for its fiscal fourth quarter, ended Dec. 31, 2021. The company’s non-GAAP income from operations was $2.20 million compared to a $5.50 million loss in the year-ago period. In comparison, its non-GAAP net income came in at $0.10 million compared to a loss of $7.40 million in the prior-year quarter. However, its loss per share grew 118.2% year-over-year to $0.24.
Past and Expected Financial Performance
AKAM’s revenue and total assets have grown at CAGRs of 8.6% and 14.2%, respectively, over the past three years. Analysts expect AKAM’s revenue to increase 9% for the quarter ending March 31, 2022, and 8.4% in its fiscal year 2023. The company’s EPS is expected to grow 2.9% for the quarter ending March 31, 2022, and 11.3% in its fiscal 2023.
In comparison, NET’s revenue and total assets have grown at CAGRs of 50.5% and 99.6%, respectively, over the past three years. The company’s revenue is expected to increase 55.2% for the quarter ending March 31, 2022, and 35.8% in its fiscal 2023. Its EPS is expected to grow 100% for the quarter ending March 31, 2022, and 233.3% in fiscal 2023.
Profitability
AKAM’s $3.40 billion trailing-12-month revenue is significantly higher than NET’s $656.43 million. AKAM is also more profitable, with an EBITDA margin and net income margin of 33.33% and 17.77%, respectively, compared to NET’s negative values.
Furthermore, AKAM’s 13.91%, 6.24%, and 6.67% respective ROE, ROA, and ROTC compare with NET’s negative values.
Valuation
In terms of forward non-GAAP P/E, NET is currently trading at 3,723.37x, which is significantly higher than AKAM’s 18.72x. Furthermore, NET’s 356.79x forward EV/EBITDA ratio is considerably higher than AKAM’s 11.49x.
So, AKAM is relatively affordable here.
POWR Ratings
AKAM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. In contrast, NET has an overall rating of D, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Also, AKAM has a B grade for Value, which is consistent with its 12.48x forward P/CF, which is 37.9% lower than the 20.08x industry average. However, NET has an F grade for Value, which is in sync with its 461.40x forward P/CF, which is significantly higher than the 20.08x industry average.
Furthermore, AKAM has a B grade for Quality. This is justified given AKAM's 17.77% trailing-12-month net income margin, which is 179.9% higher than the 6.35% industry average. In comparison, NET has a Quality grade of C, in sync with its negative trailing-12-month net income margin, compared to the 6.35% industry average. Among 82 stocks in the Technology - Services industry, AKAM is ranked #8. However, NET is ranked #24 out of 28 stocks in the Software - Security industry.
Beyond what I have stated above, we have also rated the stocks for Growth, Momentum, Stability, and Sentiment. Click here to view all the AKAM ratings. Also, get all the NET ratings here.
The Winner
The content delivery network (CDN) industry is expected to grow rapidly with the increasing use of smartphones and wearables. And while both AKAM and NET are expected to gain, we think it is better to bet on AKAM now because of its lower valuation, higher profitability, and better financials.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology - Services industry here. Also, click here to access all the top-rated stocks in the Software - Security industry.
Click here to check out our Software Industry Report for 2022
NET shares were trading at $103.36 per share on Thursday afternoon, down $8.63 (-7.71%). Year-to-date, NET has declined -21.40%, versus a -7.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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