Akamai Stock Is Up Amid COVID-19 Crash as Web Traffic Soars
For years, internet traffic growth has been booming. Not only are more corners of the globe getting connected for the first time, but the number of connected devices in developed markets continues to grow, and the size of data transfers is on the rise. That’s thanks in large part to video — both live and streamed content — being one of the fastest areas of rising web demand.
Even before the coronavirus banished many households to temporary confinement, internet infrastructure giant Cisco (NASDAQ: CSCO) had been forecasting mid-20% annual growth in global traffic through 2021. According to monthly traffic trends provided by content delivery network (CDN) Akamai Technologies (NASDAQ: AKAM), that pattern had been holding through Feb. 2020 with a 26% surge compared with internet usage a year ago. With many people now stuck at home, though, initial reports indicate that Akamai and other CDNs are experiencing as much as a 50% increase in traffic so far in March. With investors taking cover in small pockets of the market seen as being able to weather the storm, Akamai’s surge in demand has the stock currently trading down 5% year to date, compared with a 28% decline for the S&P 500.
Time to climb aboard the CDN train?
Before you rush to buy Akamai, I’d first like to point out that there are other CDNs out there — even if they’ve been a mixed bag thus far. 2019 IPOs and cloud computing-based start-ups Fastly (NYSE: FSLY) and Cloudflare (NYSE: NET) have been on divergent courses, with the former down 12% and the latter up 27% year to date. European telecom Vodafone (NASDAQ: VOD) has also reportedly been facilitating about a 30% increase in network demand in the U.K., but its stock is down 34% this year. Other notable telecom names like CenturyLink (NYSE: CTL) and Verizon (NYSE: VZ), which just announced a $500 million increase in capital spending to between $17.5 billion and $18.5 billion to accommodate the work-from-home movement and other network upgrades, are also down in 2020.
There’s no silver bullet for investing in uncertain times. Nevertheless, while they’re all over the board, taken as a whole, network providers and CDNs are beating the market overall. As the world (eventually) gains the upper hand in the battle against COVID-19, the massive uptick in web traffic is unlikely to continue like it has been recently. However, major events like this tend to reshape global trends and collective thinking, leaving a lasting imprint on the world once they have passed. A growing remote workforce and generally higher internet demand was already a massive trend that just got a dose of rocket fuel. If companies that deliver requests for data — both personal and business — weren’t on your radar before, they should be now.
Which ones to buy
Akamai is one of the largest CDNs and a well-established player in the industry. The company’s revenue increased 7% in 2019, but free cash flow (money left after cash operating and capital expenses) decreased 18% as the legacy internet delivery network invested to upgrade its operations. It isn’t a bad place to start, but at 31.1 times free cash flow, the stock is still priced at a premium, thanks to its outperformance so far this year. Other legacy firms like CenturyLink (which I recently just parted ways with) and Vodafone (which carries a very large debt burden) are worth a look but aren’t particularly nimble or able to quickly adapt to changing times.
An exception to the rule is Verizon, which also has its fair share of long-term obligations ($110 billion at the end of 2019) but is profitable enough that it can manage that burden while simultaneously investing in new network upgrades like fiberoptic and 5G wireless. Other U.S carriers are making headway in this department, but Verizon remains in the lead and is using 5G to enable new capabilities for businesses.
And then there are the upstarts like Fastly and Cloudflare, which are going after legacy CDNs like Akamai with their flexible cloud-based services purpose-built to meet the needs of modern business operations. Internet content delivery is a crowded space, but both companies are making headway and have a path to profitability if they can maintain their momentum. Fastly’s revenue grew 39% in 2019 and Cloudflare’s grew 49%. A word of caution on these two: As small, fast-expanding outfits that favor sales growth over profits at this point, these two stocks can be especially volatile and should be bought in small batches with the intent of adding to an initial position over time.
There are options out there for investing in a world post-coronavirus, but one thing is for sure: Cisco’s call for annual double-digit percentage increases in internet traffic looks like a sure thing. Add CDN stocks to the list of players that are poised to benefit.
Nicholas Rossolillo owns shares of CenturyLink and Verizon Communications. The Motley Fool owns shares of and recommends Fastly. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
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