Akamai Technologies Inc. (AKAM) is set to expand its presence in Central and Eastern Europe (CEE). The company will extend its services to five countries in the region namely Czech Republic, Hungary, Poland, Romania and Slovakia. Akamai will also open a branch office in Krakow, Poland to support its CEE customers.
Akamai is expected to benefit from the huge demand in the region. According to research firm, Forrester, the CEE region is estimated to reach overall Internet adoption rates of 54% by 2013.
PricewaterhouseCoopers anticipates that broadband connections in the CEE region will reach 43.2 million in 2012, an increase of 10 million from the 2010 total of 32.9 million.
Eurostat reports that a significant portion of online commerce in Europe is coming from the Czech Republic (15%), Hungary (14%) and Slovakia (11%).
We believe that the increasing adoption of online services and cloud computing in the region will drive Akamai’s top-line growth going forward.
Akamai is also trying to strengthen its existing channel partner program in order to support different verticals such as enterprise, commerce, financial services, high-tech, manufacturing and media markets in CEE going forward.
We believe the expansion into the growing economies of Central and Eastern European countries bodes well for Akamai, as it will reduce its dependence on the sluggish domestic market. In 2010, the company derived 72.0% of its revenues from the U.S., while the remaining 28.0% came from its foreign operations, of which Europe alone accounted for 17%.
Moreover, the expansion will offset any negative impact from the debt ridden western European markets going forward.
Recently, AT&T Inc. (T) announced the expansion of its content delivery network (CDN) service. With traditional carriers and media companies such as AT&T, Verizon Communications Inc. (VZ) and Comcast Corp. (CMCSK) entering the content delivery market, we expect Akamai to face significant competition and pricing pressure on its value-added services going forward.
Over the last few quarters, value-added services have been a major revenue contributor for Akamai. In the first quarter of 2011, value-added services accounted for 60.0% of total revenue. The company earned revenues of $276.0 million, up 15.0% year over year.
We believe that this expansion will help Akamai to gain significant market share in the region, as it will enjoy a first mover’s advantage. Moreover, diversified operations will also boost top-line growth in our view.
Recommendation
We maintain our Neutral recommendation on Akamai over the long term (6-12 months) due to higher capital expenditure and increasing competition from companies, such as Level 3 Communications Inc. (LVLT) and Limelight Networks, Inc. (LLNW).
However, we believe that the increasing usage of cloud computing technology, higher adoption of value-added solutions, aggressive share repurchase, strategic partnerships, and growth in online video are positives for the stock over the long term.
Currently, Akamai has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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