On Thursday, HSBC downgraded shares of Akamai Technologies (NASDAQ:AKAM), moving the rating from Hold to Reduce. The firm also lowered its price target on the stock to $96.00 from the previous $109.00. The decision was informed by projections that Akamai's non-GAAP EPS would increase at a compound annual growth rate (CAGR) of only 3-4%, despite anticipating a high capital expenditure (capex) to revenue ratio of 15-17%.
The analyst at HSBC indicated that their earnings per share (EPS) estimates for 2024 and 2025 are approximately 10% below the consensus of Visible Alpha. This lower expected growth rate is a key factor in the downgrade and adjustment of the price target. They noted that while Akamai's stock is currently trading at 19.6 times the estimated non-GAAP earnings for 2024, which is consistent with other low-growth companies in the sector, it should be valued at a discount due to its higher capex intensity.
The high capex/revenue ratio suggests that Akamai is investing a significant portion of its revenue back into the company, which, according to HSBC, does not correspond with the expected rate of earnings growth. This financial outlook has led to the reduced rating and price target for the technology company's stock.
The downgrade comes at a time when investors are closely monitoring technology stocks, particularly those in sectors where growth expectations are tempered. Akamai's new price target of $96.00 reflects the analyst's perspective that the company's financial performance may not align with sector averages due to its investment strategy.
In summary, HSBC's revision of Akamai Technologies' stock rating to Reduce and the decrease in the price target to $96.00 are based on the firm's analysis of the company's expected earnings growth and capital expenditure levels. The analyst's comments highlight the rationale behind the downgrade, focusing on the comparison of Akamai's valuation with its peers and the anticipated financial performance.
InvestingPro Insights
Following HSBC's downgrade of Akamai Technologies (NASDAQ:AKAM), InvestingPro data and tips provide a broader perspective on the company's current financial health and market sentiment. Despite the recent dip in stock price, InvestingPro tips indicate that management has been actively buying back shares, potentially signaling confidence in the company's value. Moreover, a notable number of analysts have revised their earnings upwards for the upcoming period, suggesting a potential underestimation of Akamai's future performance by HSBC.
From a valuation standpoint, Akamai's current market capitalization stands at $17.32 billion USD, with a P/E ratio of 31.89, which is adjusted to 28.64 when considering the last twelve months as of Q4 2023. This P/E ratio is indeed higher than the industry average, which may justify HSBC's concerns regarding its valuation. However, it is important to note that Akamai has a solid revenue growth of 5.4% over the last twelve months, and its gross profit margin stands at an impressive 60.36%, indicating strong operational efficiency.
Investors considering Akamai Technologies may find it reassuring that the company is profitable over the last twelve months and analysts predict it will continue to be profitable this year. Additionally, Akamai's cash flows are robust enough to cover interest payments, and its liquid assets exceed short-term obligations, reflecting a healthy balance sheet.
For those seeking a deeper dive into Akamai's financials and future outlook, InvestingPro offers a comprehensive set of additional tips. There are 7 more InvestingPro Tips available, which can provide further insights into the company's performance and market position. Prospective subscribers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, enhancing their investment research with valuable, real-time data and analytics.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.