AI Fuels Rally in Internet Infrastructure Stocks

Cloudflare shares have surged by 121% from their February low, while Akamai has climbed 51% from its November lows, and Fastly recorded a 159% gain this year.

These companies, known as content delivery networks, provide server hubs that manage digital traffic, ensuring faster and more reliable internet operations.

The fundamental principle behind the success of CDNs is their ability to thrive on increasing internet traffic, a condition dramatically boosted by the proliferation of AI agents.

Unlike humans who might visit only a few websites, AI agents visit thousands to perform tasks such as comparison shopping, serving as a significant catalyst for network demand.

Cloudflare CEO Matthew Prince indicated in June that traffic generated by AI agents has now surpassed human-driven traffic, underscoring the growing reliance on robust infrastructure to manage automated web activity.

Akamai introduced the 'Akamai Inference Cloud' to facilitate the processing of data by AI models, recognizing a shift in focus from model training to widespread utilization.

CEO Tom Leighton elaborated that while AI model training can occur in centralized core data centers, the crucial daily usage, or 'inference,' must happen close to the end-user or robot.

This proximity is essential for speed, efficiency, and scalability, with smaller, distributed data centers being easier to deploy and effective in reducing latency.

Akamai recently secured an $11.6 billion, seven-year contract with Anthropic to provide critical capacity, translating to an approximate annual revenue of $1.66 billion for Akamai.

This contractual commitment is substantial relative to Akamai's expected yearly earnings, marking a significant win for the company.

Despite an initial stock spike following the announcement, share prices retraced, a development Cramer considers a potential buying opportunity.

Fastly gained significant popularity during the pandemic era as a content delivery network for TikTok but subsequently lost most of that business, leading to a prolonged stock decline.

The company's prior success was largely tied to TikTok's exploding popularity, highlighting the volatility associated with reliance on a single major client.

Fastly achieved profitability for the first time last year, with its stock climbing 159% year-to-date, driven by strong earnings performance.

The company is undergoing a strategic transition from being a simple content delivery network (CDN) to an edge cloud platform, a shift management attributes to the booming web traffic generated by AI agents.

Cloudflare is currently trading at a high valuation of 179 times its current year's earnings, prompting a recommendation to await a broader market pullback before considering an investment.

Fastly, despite its recent gains, trades at over 50 times earnings and is considered volatile and risky, while Akamai is viewed as a more attractive investment.

Akamai is trading at less than 16 times its earnings estimates, making it appear cheap, with its recent $11.6 billion partnership with Anthropic being a strong positive factor.

Cramer recommended maintaining only a small position in a viewer's mentioned IPO due to concerns regarding its balance sheet.

Regarding Axon (XON), while acknowledging CEO Rick Smith's leadership, Cramer cautioned against holding the stock due to expected gross margin pressure from increased competition, noting its valuation at 54 times earnings.

A caller voiced concerns about a stock that has fallen 26% since April and is characterized by significant debt.

Jim Cramer advised maintaining a small position rather than a large one due to balance sheet issues, expressing personal confidence in the company's management but also highlighting its history of financial losses.

Cramer expressed respect for Axon CEO Rick Smith but indicated that increasing competition in the market is likely to pressure gross margins.

Given the anticipated margin headwinds, Cramer considers Axon's current valuation of 54 times earnings unsustainable and suggests focusing instead on content delivery players like Akamai, driven by AI-fueled web traffic.

During the period of market volatility, Cramer emphasized his long-term support for the stock, stating, "I'M EXPLAINING WHY I STOOD BEHIND THE NAME DURING THE PERIOD WHEN IT WAS REAL UGLY TODAY."

Cramer reflected on his consistent support for Micron during its volatile periods, explaining his rationale for standing behind the company's name.