In Akamai's ( AKAM - Get Report) latest earnings report, we observed a pickup in capital expenditures related to the company building out its servers in anticipation of more business activity. However, as new competitors such as AT&T ( T - Get Report), Level 3 Communications ( LVLT) and Limelight ( LLNW - Get Report) enter the fray, we worry Akamai will have some competitive margin compression and, at the same time, continue with significant capital outlays to stay ahead of competition, resulting in a double-hit to Akamai cash flows and the $31 Trefis price estimate for Akamai's stock. If investment stays at current levels rather than decline as we estimate, this would take 10% off of our current estimates. Additionally, lower gross margins on its online shopping and media delivery from competition could subtract another 7% to 10%.
Recent quarters have confirmed a broad based acceleration across its two main business, media content delivery and online shopping content delivery, which combined make up about 45% of the company's overall value. These two businesses carry high gross margins -- 90% for online shopping content delivery and 75% for media content delivery -- which will inevitably fall in a more price competitive environment. While we currently forecast these gross margins to remain largely stable, a 10 percentage point drop in margin for shopping and 5 percentage point drop in media equate to a 7% lower Trefis price estimate for Akamai's stock. While we have not factored this into our price estimate yet, we recognize the combined higher spend, lower margin threat a large competitor like AT&T presents, which could spell problems for Akamai in the longer term. You can see the complete $31.11 Trefis price estimate for Akamai's stock here . Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.