We apply an equally weighted P/E and FCF approach to our forecasts to derive our price target, given AKAM’s single-digit topline growth, maturity, size, public company history, and profitability levels. Our price target of $95 is based on a 50/50 weighting of P/E and EV/FCF. P/E and EV/FCF target multiples are 15x/13x, a discount to historical averages given recent execution inconsistencies and low visibility in Delivery stabilization.  

Downside risks to achieving our target price:
1) Edge delivery (CDN) pricing power continues to erode – despite an improved traffic mix (away from OTT/video to gaming content, software delivery), AKAM’s realized pricing continues to erode constraining segment and overall profitability. 2) Edge apps momentum fades, unable to buoy aggregate total edge tech business growth – AKAM is still early in its edge app dev aspirations having launched this effort in earnest in 2019. A sharper fade from initial momentum could drag on total edge tech business growth. 3) COVID-impacted and economically sensitive sectors see permanent impairment in their traffic volumes, hurting the volumetric factors that underpin the edge delivery franchise. 4) persistent supply chain challenges increase network expansion overhead – AKAM has circumnavigated this challenge well thus far, but this could present a challenge if supply chain disruptions persist lowering cash flow yields. 5) Enterprise security aspirations continue to require outsized investment focus – a busy competitive landscape and AKAM’s historical fits and starts in consistently scaling an enterprise-focused sales organization could gate meaningful margin expansion.  6) More transformative, dilutive M&A – historically disciplined with large-scale M&A, AKAM is at multiple cross-roads of critical infrastructure technology disruptions due to Cloud, security, and DevOps trends. Against this, AKAM could take a more transformative stance relative to the past to future-proof its business.

Upside risks to our target price:
1) Improved traffic mix that can drive robust outperformance in delivery and traffic (CDN) volumes and increased CDN pricing power that can meaningfully improve profitability.  2) A significant improvement in the organic security business, including more visible uptake of user protection solutions under unified sales structure.  3) Fluctuations in FX, which could result in revenue tailwinds. 4) Greater customer adoption and market share gains domestically, where growth has slowed and pricing has become competitive.  5) Linode IP become the de facto edge apps development platform.