Pretty much everyone who’s trying to build a large-scale newsletter issues proclamations like “stock of the year” and “stock of the decade,” since such claims get attention… after all, attention is the currency of the online marketer.
So we’ll take this with a wee grain of salt, but here’s the beginning of Andy Snyder’s latest ad for his Manward Letter ($49, renews at $79/yr)….
“The ‘Must Buy’ $5 Tech Stock
“Amazon, Apple, Netflix and others have invested BILLIONS of dollars in this ‘Atlas Technology.’ And now – because of COVID-19 – an obscure leader in this explosive field is set to skyrocket.”
That rings all the bells, right? A connection to the heralded FAANG stocks, a low share price, the notion of “obscurity” to make you feel extra smart for buying an unknown stock. And, of course, the good ol’ made-up term “Atlas Technology” to spark a little curiosity. So what is it?
Here are the hints early on…
“It’s a crucial technology that more than 553,000 companies use to grow their businesses.
“That includes both the smallest mom-and-pop stores and the biggest companies in the world.
“Apple, for example, has invested more than $100 million in this breakthrough tech.
“The New York Times says that this fast-moving innovation is ‘how Amazon wields power in the technology world.'”Are you getting our free Daily Update
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OK, so that’s still a little bit obscure — though you can read the New York Times article he quotes here if you’re interested (it’s mostly just about Amazon squeezing out software innovators on AWS by stealing their ideas). What else does Snyder say about this secret $5 stock?
A little more hype to get your revved up…
“Beyond Amazon and Microsoft, Atlas Technology is responsible for helping companies retain up to $247 billion in global revenue every year.
“But here’s the thing…
“This technology is only just getting started.
“By 2021, Atlas Technology will take over North America. Its dominance will be UNPARALLELED.”
And then a few real clues…
“It has more than a hundred patents… many big-name partnerships… a top-shelf management team… and a LONG history of quarterly revenue growth.
“And here’s the craziest part of all…
“Right now… because of the emotionally driven sell-off, it trades for only $5 a share….
“It’s a key player in not just one but TWO markets set for massive growth in the coming years.
“Its customers include Roku, DirecTV, BBC, Marvel Entertainment, Cigna, Tencent and many others.
“It has exposure to 5G, the Internet of Things, cloud computing and numerous other sectors pegged to explode in the near future.
“In many ways, it’s the ideal ‘pick-and-shovel play’ on one of the biggest growth trends since the dawn of the internet.”
“Pick and Shovel” is everyone’s favorite investing metaphor (or at least right near the top, perhaps right next to “Razor and Blade”) — it just refers to being a supplier to a hot trend instead of riding the ups and downs of the trend directly… the idea being that it was better to be the hardware store that sold picks and shovels to the hopeful miners during the California gold rush than to be an actual prospector. The picks and shovels always made money, but prospectors rarely found gold.
So where does this “Atlas Technology” term come from? We get some hints about that…
“Like Atlas – who was forced by Zeus to hold the heavens on his shoulders – the companies that make up this industry hold up the internet via a network of ultra-powerful servers spread all over the world….
“This tech ensures that a customer can load up a company’s web page and interact with its products.
So why is this so important?
“Simple. Fast content loading speed = positive user experience.”
OK, so we’re talking about something that deals with online traffic and stability, it could be a hardware company or a data center provider but since he talks up speed it’s more likely to be a network provider — most likely a Content Delivery Network (CDN), the companies who distribute content closer to end users to balance traffic and speed delivery (like, having that suddenly popular Netflix movie served from my local telecom company’s data center, 10 miles from my house, instead of streaming it over 3,000 miles of fiber from California).
And that’s backed up by the next bit of the pitch…
“Akamai Technologies is a big one.
“This Massachusetts company facilitates as much as 30% of all web traffic.
“Its customers include IBM, Best Buy, E-Trade Financial and even the U.S. Army.
“And its stock has seen peak gains of 15,207%.”
Akamai (AKAM) was the pioneer of the CDN business, launched from an idea at MIT to a commercial service that was enabling the delivery of March Madness games and other high-traffic events online in just a couple years in the late 1990s, and the stock was indeed hugely successful (as long as you bought it after the dot-com crash… if you bought in 1999 at the peak near $300 a share, you’re still down 60% on your position). And he also refers to a couple other CDN providers, Amazon’s CloudFront and Level 3 Communications (LVLT), so we must be dealing with a company in this space.
Which narrows it down a lot… but which one is it? Apparently a big part of their business is in supporting video streaming…
“This Is a KEY Behind-the-Scenes Player in the Streaming Market…
“… with so many streaming services crowding this market, how are you supposed to pick a winner?
That’s easy. You buy the $5 stock that the biggest players go to for their video-loading needs.”
And a couple more clues…
“This company was founded back in 2001 by a man with a crystal-clear vision of the future….
“Moving quickly, he partnered with more than 600 media companies…
“Led the company through 11 consecutive quarters of profitability…
“And landed a $130 million equity deal from none other than Goldman Sachs….
“… this company’s revenue has surged almost tenfold… from $21 million in 2005 to $201 million in 2019.
“It recently celebrated its highest quarterly revenue EVER.
“What’s more, it’s now amassed 128 patents. These patents are key to ensuring this stock sustains its competitive advantage.
“It also delivered record quarterly traffic, exceeding the previous record by 25%.”
So who is it? This is the company that for many years has been the ugly duckling of the CDN business, Limelight Networks (LLNW)… and no, it’s not a $5 stock anymore, and that’s probably mostly because it got a couple big analyst upgrades, a big new boost from Amazon news, and, perhaps, because it is just catching up with the other companies in the space as investors look for growth stocks that haven’t yet soared to ridiculous valuations. To Snyder’s credit, he has apparently been interested in this one for a while — we got a lot of copies of this ad forwarded our way this week, so it’s being circulated pretty heavily right now, but it actually carries an April date.
Here’s how the company describes itself:
“Limelight Networks, Inc., a leading provider of digital content delivery, video, cloud security, and edge computing services, empowers customers to provide exceptional digital experiences. Limelight’s edge services platform includes a unique combination of global private infrastructure, intelligent software, and expert support services that enable current and future workflows.”
Limelight had a 10-year patent infringement battle with Akamai that ended a few years ago, and it is in basically the same business — caching data around the world so that it’s closer to end users, especially video because it takes up a lot of bandwidth, and using their proprietary balancing network and software to direct users to the fastest traffic path for their video needs (or whatever else they’re doing). They went public right before the great recession, in 2007, and have never recovered to that IPO price… here’s LLNW’s chart since going public (That’s LLNW in blue, with AKAM in orange and the S&P 500 in red):
Most of the weakness in LLNW shares has come, at least in the past eight or nine years, because they haven’t really grown. Revenue has often dipped lower, and over ten years sales have only gone up by 48% — which isn’t terrible for an established company, but is downright pathetic for a technology services company (Akamai, which is many times larger than LLNW, grew revenues by more than 200% during that time… Amazon grew revenues almost 1,000%). So that’s probably the main reason the shares have languished, they just haven’t gotten much revenue growth going. It’s OK to be unprofitable if you’re growing fast… and it’s OK to grow slow if you’re making a decent profit… but LLNW has neither grown fast nor made money in a dozen years (OK, they were profitable in 2018, and they have sometimes reported a small non-GAAP profit thanks to stock option compensation… but those appear to have been flukes).
And that has changed recently, to their credit… which is probably why the stock has perked up this year. Analysts now expect LLNW to be profitable on a non-GAAP basis for 2020, and even GAAP profitable in another year or two. Strangely, though, revenue expectations are still quite low — so maybe that’s where the opportunity lies. Analysts don’t particularly trust Limelight, I expect, so they’re not laying out aggressive forecasts, and while Limelight has seen a surge of traffic demand as streaming has picked up during the stay-at-home COVID-19 crisis, the forecast is still for just 15% revenue growth in 2020. Maybe that’s excitement enough for this company, which posted revenue growth of only about 3% in 2019, but there might be some potential for them to “surprise” a bit as the streaming wars heat up.
The company has 15% revenue growth as its long-term target, and expects to be in that range this year as of their first quarter presentation, so that’s probably where the analysts are getting the number from. And they are really optimized for and built for the “over the top” streaming world, where hundreds of new streaming services compete to deliver video content direct to subscribers, so they should be doing well right now.
They also say the right things about building an “Edge Computing” network, which has been the driving theme behind recent hot IPOs Fastly (FSLY) and Cloudflare (NET), both of which trade at wildly higher valuations than Limelight Networks (both are around 30X sales and are not yet profitable, versus 4X sales and the expectation of near-term profit for LLNW).
The exciting thing for Limelight is that IF they can convince investors they’re real, and will be a major beneficiary of the explosion in streaming because of their legacy leadership position in that technology, then they might earn a higher valuation akin to their near-peers. And the hope comes from revenue growth, which recently popped up to 30% for LLNW after so many years of being in the single digits (or even negative), if they can sustain something in the 20-30% range, profitability should ramp up more quickly and they’ll get a stronger valuation — probably not quite like the startups which are growing at 40-50%, but maybe at least better than Akamai, which has been consistently profitable and is clearly the “blue chip” of the space but only grows sales at about 7-9% a year (right now, both AKAM and LLNW are valued at 4X sales).
We get the next indication of that in about three weeks, Limelight will report its next quarter on July 20. The recent surge in the share price to over $7 has been driven by Amazon’s talk of getting into live video (Raymond James upgraded the shares, saying that Amazon Prime Video already delivers 30% of Limelight’s revenue and might grow substantially), and by those analyst upgrades — in addition to Raymond James upping the price target to $8.50 on the Amazon news, Lake Street initiated coverage with an $8 target about a week ago. Here’s a Briefing.com summary from the Lake Street note that reinforces LLNW’s claim to a much-improved video CDN:
“Lake Street initiates LLNW with a Buy and price target of $8. Analyst Eric Martinuzzi said, ‘Limelight Networks emerged from a recent period of investment with a best in class over the top (OTT) video content delivery network (CDN) that fortuitously coincided with a wave of new and planned content offerings from the likes of Disney, HBO, and NBCUniversal. As a result, we believe Limelight is now on the cusp of years of double-digit growth and margin expansion. We expect Limelight Networks’ video CDN focus—both live stream and on demand—will differentiate it. We see a bright future of new account sign-ups and higher installed base retention as its CDN-powered edge services turn competitive advantage into market share gains. We are initiating with a Buy rating and an $8.00 price target.'”
In our old neighborhood in Washington, D.C., we used to run into a little dog named Cal Ripken, Jr. at the dog park… he seemed cute, he wagged his tail, he would always walk over and look friendly, but then whenever my wife would lean over to pet him, he’d try to bite her hand. That’s how I feel about Limelight Networks… it’s been teased many times by a variety of newsletter pundits as the small-cap heir to Akamai, and I’ve written about it a number of times over the years as it always seemed like it should be doing better given all the trends in their favor, particularly the explosion of streaming video, and yet every time investors have bought on some good news in the past nine years, it has come back to bite them on the hand. It does look genuinely more positive this time around, with a little bit of revenue growth under their belt and a relatively low-risk valuation, but it’s hard to lean down again when Cal Ripken, Jr. has tried to bite you five or six times.
Perhaps you, dear reader, will be able to take a clear look at the prospects without the baggage of any LLNW experience — if so, do you like what you see? Potential for joining the stars of the CDN firmament? Or is LLNW going to bite again? Let us know what you think with a comment below.
Disclosure: Among the companies mentioned above, I own shares of Apple, Amazon, Fastly, Roku, The Trade Desk and Cloudflare. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.