Limelight Networks: $2.50 Tech Stock Has Positive Catalysts

| About: Limelight Networks, (LLNW)


Limelight Networks has been in the news this week, as it won a patent infringement case in the Supreme Court via a 9-0 decision.

The stock has some momentum that could continue for a while, as the shares are still down by two-thirds from highs made in 2011.

In addition, insiders are buying shares, and the company has a fortress balance sheet and could make a logical buyout candidate.

Limelight Networks (NASDAQ:LLNW) has been in the news this week, as the company won a 9-0 decision in a patent litigation lawsuit initiated by the giant in the content delivery space, Akamai Technologies (NASDAQ:AKAM). This ruling overturned a guilty verdict against Limelight from a federal appeals court. Other tech companies also breathe a sigh of relief, as an Akamai victory could have opened the door to a large number of frivolous lawsuits from litigants claiming induced infringement.

Not only was it nice to see David win one against Goliath for a change, but one does not see too many 9-0 decisions coming out of a divided Supreme Court these days. The last time I penned anything about this small cap tech play in January, the stock was trading at $2 a share. This recent court decision has helped push the shares up to $2.50 a share, but the company still looks like it has some positive catalysts and its recent momentum could last awhile.

An insider must have felt good about the impact of the court case, as an officer bought some $115,000 in new shares on June 2nd. This follows two other insiders buying approximately $275,000 worth of new stock in May. Insiders own over 10% of outstanding shares.

Another huge plus for Limelight is that it has a fortress balance sheet, with over $110mm in net cash, which is approximately 50% of its market capitalization. To put it in perspective, Akamai could have bought Limelight for under $150mm at its current price level, ridding itself of a competitor and picking up more than $150mm in annual revenues. Given Akamai sells at nearly six times trailing revenues, this seems a better option than a legal attack, in my humble opinion.

The company is challenged by the loss of Netflix (NASDAQ:NFLX) as a client, as it is building its own content delivery system, and still accounts for ~12% of Limelight's revenues. The company is in the midst of a migration to higher-margin services, and is doing extensive customer surveys to increase retention. Despite this, the company is still posting small quarterly losses.

On the bright side, the company is cash flow-positive on an operational cash flow basis, and has bought back over $25mm in stock over the past two fiscal years. It certainly has the firepower to boost stock buybacks or initiate a substantial dividend. Given the company is still not profitable on an earnings basis, this is a speculative play. The stock did trade over $7 a share as recently as 2011, and I will continue to hold a small position on the basis of possible buyout or turnaround, knowing its huge cash balance should provide a nice mitigation of downside. SPECULATIVE BUY

Disclosure: I am long LLNW. 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.