Analysts' Insights on AKAM's Recent Price Drop

Standing out among the Street's worst performers today is Akamai Technologies, a business services company whose shares slumped -7.7% to a price of $115.38, not far from its average analyst target price of $120.0.

The average analyst rating for the stock is buy. AKAM underperformed the S&P 500 index by -9.0% during today's afternoon session, but outpaced it by 39.6% over the last year with a return of 59.0%.

Akamai Technologies, Inc. provides cloud services for securing, delivering, and computing content, applications, and software over the internet in the United States and internationally. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.

Akamai Technologies's trailing 12 month P/E ratio is 34.9, based on its trailing EPS of $3.31. The company has a forward P/E ratio of 15.1 according to its forward EPS of $7.63 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.96, and the average for the S&P 500 is 15.97.

To better understand AKAM’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Akamai Technologies’s PEG is 2.36, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Akamai Technologies was $847.99 Million as of its last annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In AKAM's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $857.84 Million and they've been growing at an average rate of 2.6%.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Akamai technologies's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3.79, but is still below the average P/B ratio of the Consumer Discretionary sector, which stood at 4.24 as of the first quarter of 2023.

Akamai Technologies is likely overvalued at today's prices because it has a higher P/E ratio than its sector average, an average P/B ratio, and positive cash flows with a flat trend. The stock has mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into AKAM's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.