Akamai Technologies (NASDAQ:AKAM) faced a downgrade by HSBC, reflecting the investment firm’s anticipation of “further weakness” in the core content delivery business for the technology company.

Market reaction saw little change in premarket trading.

Concerns Over Customer Contracts Impacting Revenue

HSBC analyst Stephen Bersey explained, “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.”

Bersey further expressed unease about the persistent weakness in the content business and lowered the rating on Akamai to Reduce from Hold. The price target was also adjusted, reduced to $96 from $109.

Financial Performance and Guidance

Furthermore, despite a mixed performance in the fourth-quarter earnings, Akamai’s guidance for the current quarter of $995M exceeded market consensus, instilling some level of confidence among investors. However, concerns were raised concerning the company’s ability to meet the set guidance.

It has been noted that during periods with contract renewals, companies often tend to be overly optimistic in their guidance to maintain a strong bargaining position with customers.

Analyst’s Projections and Market Sentiment

According to Bersey, adjusted earnings per share are anticipated to rise only between 3% and 4% on a compound annual basis, despite a high capex to revenue ratio of 15% to 17%. Akamai’s stock is also perceived to be expensive, trading at 19.6 times adjusted 2024 earnings.

However, it is crucial to note that while HSBC has expressed caution, larger market sentiment remains largely optimistic. Seeking Alpha and Wall Street analysts have continued to rate Akamai as a HOLD and BUY respectively.