Limelight Networks - Cult Of Confusion
Seeking Alpha Analyst Since 2019
Former WSJ and II ranked sell-side analyst covering special situations and TMT.
Summary
- In another in a series of silly analyst commentaries we see continually issued by "bulge bracket firms", an IB reinstated LLNW yesterday with a HOLD and pinpoint $4.75 target price.
- The analyst seems confused as he calls for commoditized margin pressure but models GM% up 2020-2022.
- Further, the pundit indicates sales hires will pressure COGS, which any simpleton accounting student knows is incorrect as that expense allocates to SG&A.
- LLNW's 3Q19 EBITDA was hurt by a S Korea POP deployment unaccompanied by a major customer porting traffic (200bp). Further, COVID caused capex delays in India (40bp), and R&D and SE Asia circuits hit EBITDA. Normalizing results they were fine in our view and better than LLNW's best comps FSLY and NET which lose money at similar scale.
- The analyst incorrectly indicates FSLY NET are not proper comps at 20x-40x sales, and that more mature AKAM at 5x sales is appropriate as a benchmark. Worse, he applies a 50% haircut to AKAM based on scale and margins. He then goes on to use fiber-based bandwidth provider CCOI at 5x sales as a comp, which makes no sense as that is a FTTx Tier-1-Internet-Backbone that bought the old PSINet years ago. LLNW's valuation at 2.3x 2021E sales is a 50%-90% discount to the peer group range populated by AKAM FSLY NET. The Company's business funnel is booming evidenced by ramps at AMZN, DIS, ROKU, SNE, T and more. LLNW's private low latency backbone is perfectly geared for the secular growth of OTT video, gaming and now EDGE computing (where LLNW has been selling for three years). We think the latest confused analyst report has presented a buying opportunity for investors, and "ironically" possibly for that firm's investment banking client(s). We reiterate our STRONG BUY recommendation and $10 target, which represents an EV of $1.38BN or 5x 2021E sales, a steep discount to the peer group mean and median.
LLNW Cap Table @ $4.43
LLNW Cap Table @ $10
Author Comment
We continue to believe LLNW will be acquired if it remains in the single $ digits. You simply cannot have comps at massive premiums to LLNW that can buy the Company in a highly accretive transaction that creates scale and expect the Company to remain independent. LLNW has been strangely quiet issuing no PR while their top customers blow out Fire TV sales, ROKU dongles boom, new movie releases at DIS go DTC with theaters closed, and SNE sells out PS5 consoles worldwide in 12 hours, among other things. Risk/reward strongly favors bullish positions at current levels heading into a seasonally strong 4Q window with conservative guidance after an overreaction to a poorly explained 3Q report. Further, we predict margins will recover far sooner than this analyst firm models, as management has indicated they will either load up the S Korea POP or exit it, while India capex is now on track and prior R&D and circuit investments should diminish and/or scale up 2021 revenues and EBITDA.
Analyst's Disclosure: I am/we are long LLNW.
We intend to provide additional commentary in our ongoing coverage of LLNW.
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