With over a decade of rapid cloud expansion, the next wave of data-centric computing is now underway: edge computing. Simply put, edge computing brings data out of a central cloud to a more localized data center, speeding up the time it takes a user to receive requested information (such as when a web link is clicked) and reducing the amount of data traveling across Internet infrastructure.
Expected to grow well into the double-digit percentages in the next decade, global spending on edge computing creates new investment opportunities. Three stocks worth buying right now are Verizon Communications (NYSE: VZ), Limelight Networks (NASDAQ: LLNW)and Akamai Technologies (NASDAQ: AKAM).
Wireless networking, the ultimate edge investment?
Nicholas Rossolillo (Verizon): Over the years, the lines between cordless phones and Internet services have become blurred and new 5G networks are in pace to continue this trend. America’s largest wireless provider, Verizon, recently launched its version of nationwide 5G – behind nationwide implementations on T Mobile and AT&T – and extended its 5G millimeter wave (billed as a broadband Internet competitor) to parts of 55 cities.
What is this talk about 5G for edge computing? While a wireless signal that enables communication and web services is the end product for you and me, Verizon and its colleagues have worked hard to build behind-the-scenes infrastructure to provide ultra-fast wireless signaling. In addition to the cell towers themselves, new fiber-optic lines will be run and local data centers will be built to handle web traffic. And while the 5G race is still in its infancy, Verizon is using cash to enable the new network edge features – an expected $ 17.5 billion to $ 18.5 billion this year alone.
The cost of making network upgrades is expected to enable more than burning fast video streams to your smartphone. Even on its leading 4G LTE network, Verizon supplies connected fleet services, industrial equipment, smart home devices and urban services such as traffic lights and cameras. And as technology improves, 5G backed by edge computing can help with the development of autonomous vehicles, robotics and other AI applications.
Granted, Verizon is no growth stock. But as edge computing grows, I still like America’s leading network. Even with large expenditures to improve its ability to move data efficiently, this is a profitable business that has generated over 21 billion. $ In free cash flow (income minus cash operating and capital expenses) during the last year. And with stocks trading only 11 times after 12 months of free cash flow and paying a dividend of 4.3%, I think it’s a decent place to start building an edge-based computer investment.
This CDN expert wants to steal the spotlight from the edge
Anders Bylund (Limelight Networks): This CDN (Content Delivery Network) operator may not be the first name that comes to mind when exploring the edge computing space, but Limelight Networks is stealing a march on the competition in this market.
First, Limelight’s CDN services with bread and butter play an important role in the delivery of digital media and large downloads on a global scale. The company employs hundreds of edge routers to perform this task. But it’s not exactly an edge computer situation, and that’s not why I chose Limelight today.
You see, the company is making a significant investment in arming its edge routers with local computer horsepower and gaining a foothold in the doorstep of the burgeoning edge computing market. CEO Bob Lento sees an addressable edge computing market that is much larger than the CDN space.
“If you go by the numbers that analysts provide, it’s many times larger than the market for CDN. How much of that can be addressed with our customer base remains to be seen,” Lento said in July in second-quarter earnings calls. “No matter how we try to cut it, it always turns out that the market for edge services is bigger than the market for CDN.”
Edge computing is a new addition to Limelight’s product portfolio, and it does not yet make a meaningful contribution to the company’s top or bottom line. We look at Limelight’s long-term growth engine here hidden under a more visible layer of successful CDN operations. The stock has doubled over the past year as the company helped several streaming video services spread their wings during a time of pandemic lockdowns – a perfect storm that gives Limelight more assets and freedom to explore high-octane growth ideas like edge computing project.
Adheres to the leader in the data processing industry
Billy Duberstein (Akamai Technologies): To play edge computing, I throw the largest content delivery network out there in Akamai Technologies. While upstart rival Quickly gets a lot of hype, Akamai achieves three times the profit that Fastly will achieve income this year. Akamai is also a growing leader in cloud security solutions, a fast-growing segment that is becoming all the more important as computing is pushed to the edge of distributed networks.
Last quarter, customers trusted Akamai to deliver over 100 terabits per. Second in 135 countries, powered by over 300,000 servers in over 4,000 locations with almost 1,500 network partners worldwide – leaping across borders ahead of competitors. This scale and trust has provided Akamai 220 of the world’s leading OTT broadcasting companies as customers as well as 24 of the 25 most popular video game publishers.
Despite its large size, Akamai is still showing solid growth and margin expansion. Last quarter, Akamai revenue grew 12.7% to $ 795 million, while operating revenue increased even more impressively by 40.2% to $ 190 million. Akamai particularly benefited from a 19% increase in media and operator customer traffic as people clung to social media and streaming TV through the pandemic-plagued second quarter. An even higher growth segment for Akamai was its cloud security solutions, which rose 27% to $ 259 million. Management highlighted that Akamai had defended a major bank and a major ISP against “two of the biggest attacks ever seen.”
While some may think the size may limit returns, the transition to 5G and fast, secure communications due to the pandemic should provide sufficient tailwind to the entire CDN and cybersecurity industry. In addition, during the conference call with analysts in the second quarter, management said it had actually gained traffic share in the quarter. The CDN market is still quite fragmented, which means that even the largest player has the opportunity to increase its market share.
Meanwhile, Akamai is trading for a rather demanding 20 times 2021 earnings estimate, making it a much better value than Fastly and other potential upstarts.