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Why Limelight Networks Stock Crashed on Friday

By Anders Bylund – Updated Oct 23, 2020 at 11:55AM

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Investors overreacted to a small earnings miss that sprung from a perfectly ordinary financing choice.

What happened

Shares of Limelight Networks (EGIO -0.61%) crashed on Friday, following the company's mixed third-quarter earnings report. The stock of the expert in content delivery networks fell as much as 29.6% in the early morning, recovering to a 27.4% drop as of 10:38 a.m. EDT today.

So what

Limelight's sales rose 15% year over year to $59.2 million. Adjusted earnings swung from a $0.01 profit to a $0.01 loss per share. Your average analyst expected earnings near $0.02 per share on revenue in the neighborhood of $58.9 million.

Management also lowered the midpoint of its full-year earnings guidance from $0.08 to $0.06 per share while leaving the top-line target unchanged at approximately $235 million.

A dollar bill folded into an arrow pointing downward.

Image source: Getty Images.

Now what

This sharp drop in share price looks like a knee-jerk reaction, as if investors were looking for an excuse to lower Limelight's soaring stock price. It was trading 51% higher year to date by the closing bell on Thursday; after today's plunge, the stock was brought back in line with the S&P 500's 7% gain in 2020.

Keep in mind that Limelight's actual business results met every expectation. The bottom-line miss was a direct result of taking on some long-term debt during the quarter. Interest payments on the $106 million of net proceeds from July's sale of convertible bonds lowered both the third-quarter result and the full-year guidance target by approximately $0.03 per share.

None of the additional funds have been used yet, but the boosted cash reserves may give Limelight the flexibility to increase its infrastructure investments, make a small acquisition, or try other new ideas that had been out of the company's financial reach.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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