Firebird's Steven Gorelik on why Akamai's security business makes $AKAM interesting

Episode Summary

Executive Summary: The episode examines Akamai (AKAM) as a three-part platform: declining legacy CDN delivery, fast-growing security, and emerging cloud compute. Steve Gorlick argues the stock is attractive because the newer businesses are growing 20%+ and leverage Akamai’s global edge network and customer relationships. The discussion focuses on cross-selling, valuation, insider buying, stock comp, and whether the business can re-rate as growth accelerates.

Main Topics: What Akamai does: CDN as the foundation (Priority: 5/5): Akamai began as a content delivery network that speeds internet content by placing servers and ISP relationships closer to users, reducing latency for streaming, gaming, and other performance-sensitive applications. Legacy delivery business is declining (Priority: 5/5): The original CDN segment has been pressured by competition and large customers building their own networks, making delivery a low-growth or declining business and a source of market skepticism. Security as the main growth engine (Priority: 5/5): Akamai has built a substantial cybersecurity business through acquisitions plus cross-selling to its existing enterprise base, turning security into a large, fast-growing revenue contributor. Cloud compute expansion via Linode (Priority: 4/5): Akamai’s compute strategy targets edge-based workloads where low latency, geographic constraints, or lower cost matter, positioning the company as an alternative to hyperscalers for specific use cases. Valuation, stock comp, and capital allocation (Priority: 5/5): The conversation weighs whether acquisitions and buybacks create shareholder value given significant stock compensation, while also noting the founder-CEO’s low salary and meaningful insider buying. Why the market may be mispricing the business (Priority: 4/5): The key thesis is that Akamai may be at an inflection point where declining delivery is becoming a smaller share of the mix, allowing overall growth and valuation multiples to improve. AI optionality and edge infrastructure (Priority: 3/5): While Akamai is not aggressively buying GPUs, the edge network, compute capacity, and data center/power access could still benefit from AI-related demand over time.

Key Arguments: Akamai’s legacy CDN business is mature to declining, but that weakness is only part of the company today because delivery is roughly 40% of revenue. Security is a proven growth platform: Akamai has used acquisitions and cross-sell to build a large cybersecurity franchise growing around 20%–25% annually. The company’s customer relationships are a competitive advantage because it already speaks to CTOs/CIOs who can be sold additional services like DDoS protection, zero-trust, and compute. Cloud compute fits Akamai’s edge network because some workloads benefit from low latency, location constraints, or lower cost versus hyperscalers. Akamai’s compute and security businesses are economically attractive enough that their valuation could justify much of the company’s enterprise value if growth persists. The market may be underappreciating an inflection from mid-single-digit overall growth to high-single-digit or low-double-digit growth as delivery becomes a smaller mix. Insider buying and founder alignment suggest management sees value; the CEO’s open-market purchase was highlighted as a positive signal. Despite stock-based compensation, the business still appears capable of producing acceptable shareholder returns if growth and margins hold. Akamai’s structure may make sense because delivery, security, and compute all serve the same internet infrastructure customer base and can be sold together. AI is not the core thesis, but it adds optionality via edge use cases and data-center infrastructure demand.

Data Points: Akamai delivery revenue mix: ~40% of revenue - Legacy CDN/delivery business share at the time of discussion Akamai security revenue mix: ~45% of revenue - Security business has become the largest growth engine Akamai compute / other mix: ~15% of revenue - Compute business is smaller but growing Security business revenue growth: 20% to 25% per year - Reported growth rate for the security segment Security business revenue: $1.7 billion - Approximate security revenue by end of 2023 Security business starting point: ~$400 million in 2016 - Growth from an earlier smaller base Security acquisition spend through 2023: ~$2.4 billion - Total acquisition spending on security-related deals since 2014/2016 timeframe Security valuation benchmark: 6x to 10x revenue - Comparable security companies trading on a standalone basis MartiCore acquisition price: $600 million - Bought in 2021 as a zero-trust/security bolt-on MartiCore revenue at acquisition: ~$30 million - Revenue base at time of purchase MartiCore revenue after cross-sell: ~$100 million - Revenue grew over two years after being integrated Zero-trust customer penetration: 12% of customers in 2022 - Usage level cited for a newer security offering Older security offering penetration: 50% to 60% of customers - DDOS protection and more mature products Linode acquisition price: $900 million - Acquired in 2021 to build the compute business Linode revenue at acquisition: ~$200 million - Approximate revenue base when acquired Cloud compute market size: ~$200 billion - Akamai’s addressable market framing for compute Compute growth assumptions: 15% to 20% per year - Market growth rate mentioned for cloud compute Akamai global server footprint: ~4,000 servers - Used to illustrate edge distribution and coverage Customer threshold: >$75,000 per year - Describes Akamai’s enterprise/mid-market customer base Customer count: 1,000+ customers - Enterprise and mid-sized business relationships Cash contribution margin: ~75% - Cited as evidence of profitability in delivery business Adjusted EBITDA (2023): $1.6 billion - Used in discussion of stock comp and cash generation Stock compensation (2023): $330 million - Presented as a significant share of earnings/cash flow Additional amortized stock comp: $60 million - Excluded item noted in the analysis Annual employee share issuance: 2 to 3 million shares - Estimated dilution from equity compensation Annual dilution: ~2% of the company - Approximate yearly share issuance rate CEO insider purchase: $2 million - Open-market buy after Q1 earnings in May 2024 CEO ownership: >$100 million in shares - Founder/CEO alignment with shareholders CEO salary: $1 per year - Used to emphasize alignment and symbolic compensation Delivery revenue decline in Q1: -10% year over year - One reason the stock became more interesting/pressured Akamai current market cap / EV: ~$15 billion EV - Approximate size discussed while framing valuation Free cash flow yield: ~6% - Starting point for valuation thesis Potential return profile: Mid-teens returns - Expected without multiple expansion if growth persists Market share in cybersecurity: 1% in 2016; 2.3% today - Used to show Akamai can gain share in security Cybersecurity market size: ~$30 billion in 2016; ~ $80 billion now - Context for market-share expansion

Pivotal Quotes: "the thing about it is that I think, as a generalist, we, the advantage... is having the ability to take a look and having the mental models that are applicable things that we've seen in different industries and apply them to other industries as well." — Steve Gorlick: Explaining why a generalist investor can identify opportunity in Akamai despite technical complexity "if people start wearing goggles, AI goggles all day, it's going to be really gosh darn good for us." — Akamai CEO (quoted by host): Humorous illustration of how edge infrastructure could benefit from AI-enabled devices "we have a company that is growing at high single digits, low double digits for the foreseeable future... even without multiple expansion." — Steve Gorlick: Summarizing the investment thesis and expected return profile

Implications: If Akamai’s newer businesses keep scaling, the market may re-rate the stock as a diversified infrastructure platform rather than a shrinking CDN. For peers, the episode highlights the value of edge networks, cross-sell, and disciplined valuation in infra software.