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Akamai Technologies (NASDAQ:AKAM) was downgraded by HSBC on Thursday after the investment firm said it expects "further weakness" in its core content delivery business.
Shares were little changed in premarket trading.
"The company flagged that 7 of its top 10 delivery customer contracts are up for renewal in [first-half of 2024] and that it expects an initial drop in revenue, suggesting continued pricing and volume pressure," analyst Stephen Bersey wrote in a note. "As Akamai leverages its core content business to cross sell security and compute services, we are concerned about the persistent weakness in the content business."
Bersey lowered his rating on Akamai to Reduce from Hold and cut his price target to $96 from $109.
Akamai earned $1.69 per share on $995M during the fourth-quarter, mixed when compared to the $1.60 per share and $999.71M analysts had expected.
However, its guidance for the quarter in progress of $995M was above the market consensus of $993.5M. Expected earnings per share of $1.59 to $1.64 were above the $1.60 per share consensus.
"The company’s guidance for 1Q24 and 2024 is in-line with consensus, but we are concerned that Akamai will fail to deliver on the guidance," Bersey added.
"We have noted in the past that guidance for periods with contract renewals often tends to be optimistic given that, realistically, lower guidance would signal a weak bargaining stance to customers."
In conjunction with the downgrade, Bersey said he expects adjusted earnings per share to rise only between 3% and 4% on a compound annual basis this year and next year, despite a high capex to revenue ratio of 15% to 17%. And the stock looks expensive, with shares trading at 19.6 times adjusted 2024 earnings, as Bersey believes it should trade at a discount to peers due to higher capex spending.
Analysts are largely bullish on Akamai (AKAM). It has a HOLD rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates AKAM a HOLD.