Akamai's Strategic Expansion

With the growing demand for Akamai Technologies Inc.’s (AKAM - Analyst Report) cloud based services in the Latin American countries, the company is opening a new services and support center in Costa Rica. Through this initiative the company will deliver its cloud infrastructure solutions.

Expansionary initiatives to cater to Argentina, Brazil, Chile, Colombia, Mexico and Peru bode well for the company’s long-term prospects as these countries have recorded a steady growth in online usage in recent times. Brazil and Mexico accounted for the highest online usage. Market research firm Gartner expects IT spending in Brazil and Mexico to exceed $140 billion and $56 billion in 2012, respectively. Moreover, Gartner expects Latin America to generate approximately $326 billion in IT spending this year.

Akamai’s cloud infrastructure solutions have been seeing robust demand. In the last concluded quarter, this segment comprised 58% of its total revenue, an increase of 22% on a year-over-year basis.

According to Gartner, the global cloud services market is expected to grow 19.6% in 2012 to $109.0 billion. Moreover, the cloud management and security services segment is estimated to reach $3.3 billion in 2012. Gartner expects Argentina, Mexico and Brazil to be some of the strongest markets this year. This tremendous growth potential will benefit Akamai, especially in the enterprise segment where cloud technologies are being adopted rapidly.

However, Akamai has been facing margin contraction due to competition from companies such as Level 3 Communications Inc. (LVLT - Snapshot Report), Limelight Networks, Inc. (LLNW - Snapshot Report) and carriers such as AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report), who are developing their own content delivery network.

Nonetheless, we believe that strong demand for cloud infrastructure solutions, security and mobile products, online video, aggressive share repurchase and strategic partnerships are positives for the stock over the long term. Moreover, the company’s strategic acquisitions would act as a positive catalyst going forward.

Thus, we maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, Akamai has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.