Fastly Peer Limelight Networks’ Shares Gain Double Digits on Streaming TV Strength

Many internet-based services are having a heyday amid shelter-in-place orders. As a result, content delivery network (or CDN, web infrastructure tapped by organizations to deliver data and content to customers) stocks are booming. Upstart Fastly (FSLY 3.90%) is up over 300% this year as e-commerce and edge network computing are in high demand. 

But TV streaming is also on the rise as consumers spend much of their entertainment time in front of a screen at home. While it hasn't boomed quite like Fastly has, video CDN specialist Limelight Networks (LLNW +0.00%) has been doing well too, with a more than 80% return so far in 2020. After a solid second-quarter 2020 report, I still say this one's a buy.

Betting big on video

Limelight Networks has been reporting double-digit year-over-year growth since last fall, when Disney's (DIS 2.40%) Disney+ made its debut. Limelight has maintained that momentum even as the coronavirus pandemic has sidelined global live events like sports. In Q2 2020, revenue built on the 32% advance reported in Q1. Profit margins rallied as well when Comcast's (CMCSA 1.36%) Peacock arrived in April, and again when AT&T's (T +0.62%) HBO Max launched in May, partly via Limelight's distribution network.

EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: Limelight Networks.

Limelight is investing in new services to maintain its revenue trajectory. A new service centered around live events will soon debut (though live events were pretty much non-existent last quarter due to the coronavirus lockdowns), new software and development kits will be made available to help developers deploy content more quickly, and edge network distribution is also getting under way.

As a reminder, edge networking (whereby content gets pushed out of the cloud and located closer to the point of final consumption) is what has Fastly investors so excited. For Limelight and its global network of points of presence, edge networking is the natural next step. Some use cases in its new edge networking product include webpage advertising insertion and other video-centric web applications. 

Image source: Disney.

A long runway for growth

Management said it expects sequential growth in each of the next two quarters to finish off 2020. A few new big deals are nearing completion, including one with a customer that is migrating an application to the edge network. As to the industry overall, Limelight cited a report from network infrastructure giant Cisco (CSCO 2.63%) that indicates overall web traffic will increase 26% this year, and 35% specifically for video. In total, the market for web-based TV, video games, and other video is about $5 billion, and it expands considerably when the nascent edge network industry is included.

Specifically, Limelight thinks growing traffic across its platform will equate to $230 million to $240 million in revenue for full-year 2020 and $28 million to $35 million in adjusted EBITDA. At the midpoint of the outlook, that would equate to a 17% and 74% increase over 2019, respectively.  

Full disclosure, I opted to close my position in Fastly a couple of weeks ago at about $100 a share. I've closely followed Fastly since its IPO in 2019, and I might think about buying again later on, but the fast rise this year has far surpassed current or foreseeable future reality. Fastly's enterprise value of $7.95 billion puts the stock at over 33 times trailing-12-month sales, compared to Limelight's enterprise value of $831 million (or just 3.6 times trailing-12-month sales). The CDN space is growing fast, but it's a highly fragmented industry that favors many players.  

Limelight, on the other hand, looks like a compelling and overlooked growth-at-a-value play right now. Benefiting from the migration to internet-based TV and video and only just starting to break into the network edge, it's a fast-growing CDN with lots of room for upside worthy of some serious attention.