New Trade for December 23rd, 2020

The sentiment on Wall Street is optimistic this morning as investors seem to be shrugging off the risk that Trump might delay the passage of the much needed coronavirus relief package.   

Small-cap technology stocks might be a rollercoaster to hold, but their oversized upside potential makes them worth exploring.  Our trade alert for today highlights one such company that currently trades at an opportune price. 

Scottsdale, Arizona-based Limelight Networks (LLNW) sells content delivery services to media and software companies.  Limelight operates its own private network with more than 70 terabits per second of capacity across 130 “points of presence” worldwide.  It saves or caches content and serves it from the best location, with software that can scale to handle surges in demand.  This includes video and gaming content, and computer security services.  

Shares of Limelight Networks crashed 35% lower in October due to a mixed earnings report in which Limelight beat Wall Street’s revenue targets but fell short of analysts’ earnings estimates.  The earnings miss was explained by interest payments on a new debt balance of $105 million, and the lowered bottom-line guidance for the next quarter also corresponded to the same debt-service expenses.  

Investors gave Limelight Networks the cold shoulder due to a very reasonable and entirely intentional business move.  With the extra cash on hand, the company is free to make some moves that it didn’t have the financial muscle to do earlier, such as accelerated infrastructure upgrades or a modest acquisition.  

William Blair analyst Jim Breen noted that Limelight expanded its capacity ahead of new demand thanks to over-the-top offerings such as Comcast’s (CMCSA) Peacock and        AT&T’s (T) HBO Max and should also benefit from the rise in demand due to 5G devices. 

“We expect that the company will expand margins beyond 2020, as OTT video services accelerate top-line growth,” he writes.  “We believe that Limelight’s stock is attractively valued, trading at a discount to its peers on an enterprise-value-to-sales basis and relative to the growth opportunity ahead of the company.”

Limelight holds a unique position in the CDN market, combining decades of experience with a collection of growth-boosting features such as edge computing services.  The stock is priced for absolute disaster, while the business is firing on all cylinders.  This could be the buying window you’ve been looking for.