Company: Limelight Networks
Ticker: LLNW
Previous Close: $4.22 (11/20)
Industry: Technology; Content Delivery
Short-term: Buy/Hold
Middle-term: Buy
Long-term: Hold
Introduction
Limelight Networks, headquartered in Scottsdale, Arizona, is a firm that focuses on selling content delivery services to media and software companies across the world. Generally speaking, Limelight Networks is able to operate at such a high capacity because they’ve developed a unique content delivery network (CDN) that dabbles in edge computing. Limelight Networks competes against the likes of Amazon with their AWS Amazon Cloudfront and Google with their Google Could CDN. Additionally, Limelight Networks directly competes with smaller firms that are acting primarily as CDNs such as Fastly. Speaking to the efficiency through which the firm operates, Limelight Networks functions as a private network with “130 points of presence and operating speeds north of 70 terabits per second.” (Lento, 2020) To further provide context to these numbers, “fast” internet as defined by the FCC has been timed, on average, to be 25 megabytes per second. This means that Limelight Networks transmits data 2,800,000 times faster than what is officially certified to be “fast internet.” Now, this is not the fastest speed for a content delivery network; yet, this operating speed is one that feels instantaneous to the user for routine, everyday tasks and it is also one that greatly bolsters long-range connection speeds.
Why should you care?
Speed is now the name of the game as, with every passing day, the world is becoming more interconnected with faster connection speeds being standardized with the rollout of 5G. Overall, faster connection speeds can help companies that distribute (or plan to distribute) services such as self-driving cars, live video games, and video streaming worldwide. Per the matter of autonomous vehicles, by decreasing roundtrip processing times self-driving cars can react faster to external stimuli while simultaneously enabling them to be built with less sophisticated computer systems inside. This, in turn, would enable firms to produce more units for less cost which then translates to increased revenue across the board while exponentially more units are sold at the reduced prices. As it relates to online gaming, the online gaming industry has had a massive boom in the past few years and with even faster connection speeds, larger numbers of players would be able to queue up for the same games, at the same times, with the same latency as if they were using their own regional servers. With video games and related mobile entertainment, usage, downloads, and purchases begin to “die” translating to the unfortunate event of negative return on investments for firms when people stop playing them; however, the catalyst for this outcome well before this detrimental point is reached when gamers begin to have longer lobby queue times and fewer members for each match on a repeated basis. The solution to these issues, content delivery networks. CDNs would allow for greater reach during matchmaking and lobby queuing which also means fuller lobbies and more players engaging with the game regularly. This would readily create an in-game experience where everything felt vibrant and buzzing on behalf of the player and for the firms, they would be noticing exponentially increased levels of in-game, player retention rates. Social media platforms have also ventured out to be more inclusive of live content and with this, video streaming has largely increased in terms of uploads, usage, and downloads since the quarantine began putting a strain on servers to continue providing the best quality service to its customers. At the same time, individuals are tuning in to live events in increased numbers with the expectation that their streams are operating at the fastest and fullest capacity. CDNs, which would be the best solution for social media platforms and video streaming services, could readily aid in facilitating continued growth throughout the years, meeting the ever-increasing demands of the consumers, and ultimately allowing for the faster recall of streamed content.
Ideas are great, but what do the numbers say?
In Limelight Networks’ 10Q for Quarter 3 2020, we can see an increase in revenue in the past three months, nine months, and for the year which is the only real shining light as it has been operating at a net loss in 2020 so far and 2019. Now, it should be noted that these losses are not insurmountable as they have only been a few cents per share in each period shown. Limelight Networks also does not operate with positive operating cash flow and they have been investing in their company more and more. This is potentially a good sign for future earnings as they put themselves in a better position to increase income and serve clients in the years to come.
Referencing the above Limelight Networks introduction, the firm has a massive client by the name of Amazon. Even though Amazon has its own content delivery network, which as previously mentioned is a direct competitor to this company, it still uses Limelight Networks regularly to the extent of providing Limelight with 30% of its income. This business-client partnership, so to speak, can be seen in two ways: either Limelight’s services are so valuable that even cloud computing giants such as Amazon still need their services or Limelight is at risk for its clients to develop their own CDNs and essentially cut out the middleman in the coming years. Of these two circumstances, the latter is far more unlikely for its other clients as the costs and time to create a content delivery network is far more than smaller companies could afford to create in house. According to Thomas Cheatham of Seeking Alpha, it is estimated that the cost of the build-out is between $500 million and $750 million and would take between three and five years for a basic “no-frills” CDN.
Also in reference to the Limelight introduction once more, a major competitor of Limelight Networks that is comparable for investing would be the aforementioned Fastly. Fastly has about twice the balance sheet size as Limelight and has a much larger market capitalization at $8.92 billion compared to Limelight’s $485.13 million, but Limelight operates at less severe losses than Fastly (.03 vs .22 per share in the past three months). Yet, it is still Fastly that has just under half of its net asset value ($309 million out of $632 million) held in cash and cash equivalents while Limelight has only 23% of its net assets held in cash equivalents. This may be an odd statistic, but it is relevant for one major reason: consolidations. Companies with large cash balances are very attractive for consolidating.
Limelight Networks as a stand-alone company can continue to operate and function efficiently, but its concentration risks are alarming. The CDN industry is full of companies with concentration risks, leaving them prone to consolidation between themselves or to be purchased by a technology giant as they move forward with improving their own services. Limelight Networks’ market capitalization of $485.13 million is less than the cost to create such a content delivery network, which brings about the notion idea that the stock is underpriced at its current valuation and should either be bought out for more than its current market capitalization
or that the stock is overdue for bullish movement. That being said, this is a case where we have a “mediocre” to “good” company sitting at a great price to buy in. ($4.22 as of November 20th) The ideas around this company are seemingly good and can benefit from current trends, but this isn’t a long-term hold, especially if the firm fails at implementing the proper strategies that would generate them more revenue and net them profit in the future years.
My plan:
I plan to be long until there is a spike in price due to a partnership, acquisition, or merger. I’d sell enough to get my initial investment back and let the rest ride. If Limelight can turn a profit and expand their customer base, this would be a great long-term hold, but that as of now that is mere speculation.
Full Disclosure: I am long LLNW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for this article and I have no business relationship with any company whose stock is mentioned in this article. This is not a solicitation or recommendation to purchase stock.