Bullish sentiment for Limelight Networks (LLNW) collapsed after the company posted weak quarterly earnings. Instead of beating expectations like it did last quarter, Limelight’s CEO alerted analysts to severely disruptive headwinds ahead. It cited everything from Covid-19 risks to large customer order slowdowns.

Limelight lost one-third of its value last week. The pre-earnings buy may have earned over 10% in gains but the investor lost the war as a buyer. What should investors do next?

Weak Results

Limelight posted a non-GAAP EPS loss of a penny despite revenue growing 15.4%. The unexpected loss implies increasing competition and cost growth. The company did not manage the capex spend in the quarter, as sales declined. In the period, it raised $125 million through a convertible debt offering. The increased liquidity will offset the tightening credit conditions ahead. And while the pandemic is worsening, hurting credit markets, the Fed may jump in to ease investor fears.

Below, LLNW stock cratered after the quarterly report:

LLNW Limelight Networks, Inc. daily Stock Chart

Limelight won several edge deals and continued to progress its strategic plan. For example, it expanded its developer community. This will improve customer uptake over the next few quarters.

Some of its product enhancements, like Live Push, and the launch of its edge functions, will differentiate its offerings against the competition. Still, after Fastly’s (FSLY) drop in mid-Oct., investors do not want to pay a premium for LLNW stock. As shown below, the stock has several low scores in the Value category. Its overall value grade is a “C.”

Data from SA Premium

CFO Daniel Boncel said it had one competitor lowering its guidance for the quarter. So, management “felt comfortable throughout the whole year with where we were moving as a company in the and the volumes we were seeing in the business and where the edge business was going.”

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The company expects a strong volume in the seasonally improved Q4 period. At a stock price of below $4.00, investors may wait until next quarter’s report before deciding whether to hold or sell.

Potential Headwinds

Limelight warned that it will accept lower margins in the near term. Adding capacity in new geographies and expanding capacity will increase its addressable market. But the company runs the risk of over-expanding and introducing geographic risks in less stable locations.

Limelight forecast revenue of up to $240 million for this year. Its adjusted EPS is a 2-cent loss to an 8-cent gain. Despite the small market capitalization of ~$750 million, the stock’s valuations are high relative to its business risks. By comparison, Fastly has an $8 billion market cap, a better debt-to-equity profile of 0.06 compared to Limelight’s 0.56, and customers like TikTok.

To keep its customers satisfied, Limelight is willing to operate at lower margins to sustain top network performance. This will pressure profits in the near term.

Opportunity

CEO Robert Lento cited the new PlayStation, which starts shipping next month, as a potential contributor to its business. Investors will see this revenue in January 2021. Also, new streaming content this quarter rolls out for the fall season.

Lento said, “we were hopeful that we were on the one yard line of closing actually hasn’t closed and may not close till middle of next year due to some geopolitical things that have gone on with this company.” So, if the delayed deals close, Limelight has a good chance of posting better revenue figures.

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Investors may build a 5-year discounted cash flow growth exit model by opening this link. Change the metrics below or the yearly revenue growth to arrive at a different fair value.

Data courtesy of finbox

In the model above, Limelight is worth around $6.00, assuming its revenue has a compounded annual growth rate of ~13% in the next 5 years.

Investors who waited for months for Limelight to bottom should watch the stock from here. Once selling pressure eases, the stock may start climbing.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Via SeekingAlpha.com