Here’s how the teaser ad from Eric Dickson for his Breakaway Stocks newsletter starts:
“Warning: The Internet Is Shutting Down! Microsoft And Amazon Are Turning To This Company To Survive… Giving You The Chance To Grab 3,210% Before The Web Comes To A Grinding Halt!
“This is not a joke. The internet is coming dangerously close to being shut off and our online future rests in the hands of the technology this secret company has perfected. See why mega-companies like Microsoft, Amazon and CNN are putting their faith in this amazing new technology.”
And he goes on to tell us that “The internet, as we know it, is about to end.”
Like most of his ads, it’s heavy on hyperbole and light on specifics — which helps to make sure that the ad can be reused over and over again without anyone noticing (Trinity Research, the publisher, does this a lot — they’ve been sending out an almost unchanged “forever battery” teaser for years now — heck, they may have even changed the target stock by now, but the ad still sounds the same).
But the basic gist is clear: Dickson is pitching a company that solves the Internet’s traffic jam problems, and helps to make sure the Internet will survive even with the massive numbers of smartphones and tablets and new users swamping our precarious data networks.
And there aren’t a whole lot of these companies, not if you’re talking about publicly traded stocks that are close to being “pure plays” on Internet traffic routing and speed boosting — big guys like Verizon and AT&T and Google and dozens of others do a lot of this to, either for themselves or for clients, but that’s not why you buy Verizon or Google.
So, assuming for the moment that we think his opinion is valuable (but not valuable enough to dish out a hundred bucks for his “special report” — or worse, five hundred smackers for a subscription to his newsletter), which one is Dickson teasing us about?
For that, we get a few clues:
“Upwards of almost $200 Million in revenue this year alone! ….
“Only the elite have had access to the name of this company in an attempt for these fat cats to horde all the profits for themselves… Goldman Sachs owns 27%.
“They were counting on this company to stay shrouded in anonymity until the practically imminent internet shut down, guaranteeing they’re to be the only ones to walk away with those 3,210% gains….
“… shares you can buy today, for under 5 bucks, can be worth 10 times as much the day the “off” switch is hit…”
We’re not talking Mongols here (our frequent daydreaming about Mongolian riches is a topic for another day), so yes, that should be “hoard,” not “horde” — but I don’t edit ’em, I just quote ’em (insert joke here about the number of typos I’ve included in recent articles, if you must).
And what does this company do, specifically?
“There’s a reason Silicon Valley is labeling this technological breakthrough “The Future of the Internet”…
Because you see, in order for the internet to survive, this company’s tech is the only way it’ll be able to function.
So let’s answer that question that’s been gnawing at the back of your mind…
“What the heck does this company do?”
“Well, what they do is pretty simple…
“They’ve found a way to circumnavigate the internet by strategically placing their CDNs, or Content Delivery Networks where clients can access the information on the net at lighting-fast speeds.
“Essentially, they’ve built a mini-internet that can jack into world wide web, get the same information, just so much faster.
“And because their CDNs exist outside the web, they don’t get gunked up with all the useless stuff, just what their clients need…
“And it’s the only way that internet is going to survive!”
OK, so it’s a CDN company (Content Delivery Network, in case you weren’t reading closely above), and it’s under $5 a share and posted “almost $200 million in revenue” in 2010.
And they do have some big clients:
“Recently, both Microsoft and Amazon, as well as news channel, CNN, all brought their content, and more importantly, their business over to this our secret company.”
Dickson also intimates that they’ll be “winning” Facebook as a client, based on … well, I don’t know. A guess, it seems.
So which little company is he teasing? Well, we toss that into le ol’ Thinkolator and our answer pops out the other end, quick as a bunny … this is Limelight Networks (LLNW)
Which is indeed a content delivery network company, and one of the more talked-about pure plays in the sector. They have won some business from big clients, and they have helped (along with competitors like Internap (INAP) and the big telcos) to put pressure on pricing in this sector and increase competition … which has been bad news for the pioneer, Akamai (AKAM), which really invented the CDN business as it now exists (the basic idea — and this is an oversimplification, to be sure — is that these companies serve content out to the ends of the network and route traffic more intelligently for their customers, so that when you call up iTunes to download a song it can probably get it from an Akamai server at your neighborhood Comcast or Verizon data center, without having to bounce a big chunk of data to Cupertino and back).
The argument for Limelight is, in large part, that it’s small and growing and it’s a lower-cost upstart that is going to eat Akamai’s lunch … and Akamai has definitely been suffering over the last year or so as new competition has come into their space and they’ve had to continually downgrade their earnings growth projections. But while this has been the promise and potential for Limelight ever since they went public (at around $20 in 2007), it’s worth noting that although LLNW has doubled revenue over the last four years … they have never posted a real profit (they were technically profitable in 2009, but that was a one-time accounting thing, not the preferable “expenses came in at less than sales” situation).
Akamai, meanwhile, has been consistently growing earnings per share — yes, they’re growing more slowly, and yes, they’re still issuing too many new shares for stock options (as is Limelight) … but they are profitable and growing. For what it’s worth, I owned Akamai years ago and also suggested it to the Irregulars as a beaten-down pick at around $19 just about two years ago — which is nice if you agreed with me that it was time to take profits when it got to the high $40s, but not so nice if you’re still holding it down here at $22.
Akamai is still priced as the premium stock in this sector, with a PE of 14, but that’s largely because it’s the pioneer, it’s the only pure play stock that’s really consistently been profitable, and folks are now (again) speculating that it’s so cheap that it will be a takeover target by one of the big telecom stocks that wants to upgrade its content delivery services. The folks at Trefis think that the shares are worth about $31, which would be a nice 40%+ jump from here, though they also thought it was worth $35 before the latest disappointing earnings release over the Summer. And, to be honest, way back in January, when I suggested selling or taking profits and “waiting for bad news to buy” — I didn’t think the news would get nearly as bad as it has. I thought the stock would start to get attractive if it fell to the low-$30s as well … but I sure didn’t think it would happen so quickly.
Which is a long way of saying, sure, if you think the space is going to recover and the companies working in content delivery networks will regain some pricing power, or that they will somehow magically get Facebook as a major client, then maybe Limelight Networks will boom — they are, after all, down about 90% from their 2007 IPO so there’s lots of room at the top of the chart.
But frankly, the sector is quite troubled and they none of the companies seem to have figured out how to maintain pricing power very well without cutting their revenue growth — so I still think that if you’re interested in content delivery networks it’s probably silly to stretch for the upstarts when you can buy the profitable pioneer and industry veteran Akamai for a relatively cheap price, but I don’t see any really compelling reasons why AKAM stock will jump in the next few months, either, they’re still priced for growth but are just barely growing, so the “upside catalyst” doesn’t exactly leap out at you unless you believe the takeover rumors.
And if you look at the numbers, you can be tempted to consider LLNW a bargain thanks to the fact that they’ve still got about $100 million in net cash (that’s about $1 per share, more than a third of their share price) … but do note that they lost about $36 million over the last 12 months and they’re still going to be unprofitable next year, according to analysts, so they’re just continuing to churn through that cash — they’re not in danger of going out of business, but nor do they seem to be in imminent danger of generating positive cash flow over the next year.
Unless the internet really “breaks” and AKAM and LLNW jump in and “fix” it like superheroes and do some profiteering, of course.
(Those takeover rumors circulate about Akamai about every six months, just in case you haven’t been listening, and they’ve mostly provided selling opportunities — heck, I even halfheartedly made an argument that Google should buy Akamai back when I owned both stocks in 2006 … they bought YouTube instead, which was almost certainly a wiser move).
The long-standing risk, beyond pricing and competition for CDNs, is that there are lots of ways to deliver content online, and the next technical innovation may well take market share from content delivery networks, or the actual network owners may continue to ramp out more services at lower costs that make premium products from AKAM, LLNW and the like less appealing.
Most of us don’t care at all about how the internet works or what’s behind it, after all — we just want our funny cat videos and our fabulous Stock Gumshoe articles to be there when we click on ’em.
Have a favorite bargain in the CDN space? Think AKAM is overpriced junk, or that LLNW and INAP will rule the world? Let us know with a comment below. And if you’ve ever checked out Dickson’s Breakaway Stocks, click here to review it for us and let your fellow investors know whether it’s worth $500.
Full disclosure: I own shares of Verizon and Google, mentioned above. I do not own shares of any other stock mentioned, and will not trade in any security covered in an article for at least three days after publication.