With over a decade of rapid cloud expansion, the next wave of data center-powered computing is now under way: edge computing. Put simply, edge computing brings data out of a centralized cloud to a more localized data center, speeding up the time it takes a user to receive requested information (like when a web link is clicked) and reducing the amount of data traveling across the internet's infrastructure.
Expected to grow well into the double-digit percentages in the next decade, global spending on edge computing is creating new investment opportunities. Three stocks worth a buy right now are Verizon Communications (VZ -0.10%), Limelight Networks (EGIO), and Akamai (AKAM -1.01%).
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Wireless networks, the ultimate edge investment play?
Nicholas Rossolillo (Verizon): Over the years, the lines between wireless phone and internet services have been blurred, and new 5G networks are on pace to continue that trend. America's largest wireless provider, Verizon, recently launched its version of nationwide 5G -- behind nationwide deployments at T-Mobile and AT&T -- and expanded its millimeter-wave 5G (billed as a broadband internet competitor) to parts of 55 cities.
What's this talk of 5G to edge computing? While a wireless signal enabling communications and web services is the end product for you and me, Verizon and its peers have been hard at work building out infrastructure behind the scenes to make ultra-fast wireless signal available. Beyond the cell towers themselves, new fiber optic lines need to be run and localized data centers to handle web traffic need to be built. And while the 5G race is still in its nascency, Verizon is spending gobs of cash to make the new network edge capabilities possible -- an expected $17.5 billion to $18.5 billion this year alone.
The spending to make network upgrades is expected to enable more than blazing fast video streams to your smartphone. Even on its leading 4G LTE network, Verizon is powering connected fleet services, industrial equipment, smart home devices, and city services like traffic lights and cameras. And as technology improves, 5G backed up with edge computing could help with the development of autonomous vehicles, robotics, and other AI applications.
Granted, Verizon is no growth stock. But as edge computing grows, I like America's leading network nonetheless. Even with heavy spending to improve its ability to efficiently move data, this is a profitable company that has generated over $21 billion in free cash flow (revenue less cash operating and capital expenditures) over the last year. And with shares trading for just 11 times trailing-12-month free cash flow and paying a 4.3% dividend yield, I think this is a decent place to start building an edge computing investment portfolio.
This CDN expert wants to steal the edge computing limelight
Anders Bylund (Limelight Networks): This content delivery network (CDN) operator may not be the first name that springs to mind when you're exploring the edge computing space, but Limelight Networks is stealing a march on the competition in this market.
First, Limelight's bread-and-butter CDN services play an important role in delivering digital media and large downloads in a hurry, on a global scale. The company employs hundreds of edge routers to accomplish this task. But that's not exactly an edge computing situation, and it's not why I chose Limelight today.
You see, the company is making a significant investment in arming its edge routers with local computing horsepower, getting a foot in the door of the nascent edge computing market. CEO Bob Lento sees an addressable edge computing market that's much larger than the CDN space.
"If you go by the numbers that the analysts are providing, it is many times larger than the market for CDN. How much of that is addressable with our customer base remains to be seen," Lento said in July's second-quarter earnings call. "No matter how we try to slice it, it always comes 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 is not making any meaningful contributions to the company's top or bottom lines yet. We're looking at Limelight's long-term growth engine here, hidden under a more visible layer of successful CDN operations. The stock has doubled over the last year as the company helped several streaming video services spread their wings during the era of pandemic lockdowns -- a perfect storm that will give Limelight more assets and operating freedom to explore high-octane growth ideas like the edge computing project.
Sticking with the edge computing industry leader
Billy Duberstein (Akamai Technologies): To play edge computing, I'm pitching the largest content delivery network out there in Akamai Technologies. While upstart rival Fastly gets a lot of the hype, Akamai makes three times the profits that Fastly will make in revenue this year. Akamai is also an emerging leader in cloud security solutions, a fast-growing segment that will become all the more important as computing gets pushed to the edge of distributed networks.
Last quarter, customers trusted Akamai to provide over 100 terabits per second across 135 countries, powered by over 300,000 servers in over 4,000 locations, with nearly 1,500 network partners all around the world -- leaps and bounds ahead of competitors. That scale and trust has earned Akamai 220 of the world's leading OTT broadcasting companies as customers, as well as 24 of the 25 most popular video game publishers.
Yet despite its large size, Akamai is still posting solid growth and margin expansion. Last quarter, Akamai grew revenue 12.7% to $795 million, while operating income surged an even more impressive 40.2% to $190 million. Akamai benefited especially from a surge in media and carrier customer traffic, which surged 19% as people were glued 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 surged 27% to $259 million. Management highlighted that Akamai had defended a major bank and a major internet service provider from "two of the largest attacks ever seen."
While some may think size could limit returns, the move to 5G and fast, secure communications due to the pandemic should provide enough of a tailwind for the entire CDN and cybersecurity industries. Additionally, on the second-quarter conference call with analysts, management said it had actually gained traffic share during the quarter. The CDN market is still fairly fragmented, which means even the largest player has an opportunity to grow its market share.
Meanwhile, Akamai trades for a rather undemanding 20 times 2021 earnings estimates, making it a much better value than Fastly and other would-be upstarts.
