If you want 60%+ returns, FBR thinks you should buy Akamai (AKAM). The firm believes the content delivery network (CDN) AKAM is well-positioned not because of its premium pricing (which most analysts focus on), but because of its cost advantages.
Specifically, FBR expects AKAM's gross margin declines to moderate due to:
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- expectations of a continued rapid decline of IP transit prices and increased proportion of direct peering (these trends benefit AKAM since (1) IP transit makes up a large portion of cost of goods sold and (2) AKAM's premium content will attract direct peering relationships)
- AKAM offers a compelling value proposition to networks that can result in settlement-free peering and/or free or below-market IP transit pricing and co-location
- decelerating rate of decline in video delivery prices
- belief that AKAM's higher margin value-added services will make up a larger share of revenues going forward
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- continued strength in eCommerce
Importantly, FBR does not think AKAM's gross margin declines with reverse, just slow. We can't recall seeing a stock jump 60% while margins were dropping, but we''ll take FBR's word for it.
FBR reiterates OUTPERFORM on Akamai (AKAM), target price $60.
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