What: Digital content delivery company Limelight (NASDAQ:LLNW) saw its stock plunge 37% lower during the month of August, according to S&P Capital IQ data. That sharp drop erased nearly all of the gains that shareholders accrued over the last year, even though Limelight had rallied by 70% in the six months ending this past March.
So what: Shares ticked down early in August. And shareholders can blame the move on second-quarter earnings results that beat Wall Street's expectations but also came with a surprisingly large loss forecast. Limelight is seeing strong sales growth from its biggest digital content customers. However, these clients also tend to qualify for large volume-based pricing discounts and so Limelight's profitability is under pressure from this dynamic of lower-margin sales growth. That's why management boosted their 2015 revenue guidance but also warned that Limelight should lose $0.13 per share in the third quarter. Analysts were expecting more moderate losses of closer to $0.03 per share.
Yet the bigger contributor to Limelight's August stock price dive was news that it lost a long-running patent infringement court case, leading to a $45 million judgment against it. By comparison, in 2013, a rough earnings year for Limelight, the company suffered a $40 million loss. Limelight did just a little better last year with a $27 million operating loss.
Now what: There's still a small chance that management could find a way to overturn the $45 million judgment. "We are disappointed this outcome isn't aligned with the recent rulings in our favor, and are determined to continue the process," CEO Bob Lento said in a press release.
Meanwhile, management says they believe the company has a strong enough balance sheet to survive any negative ruling. To be sure, Limelight had $75 million of cash on its books as of the end of June, which means it could easily handle a $50 million loss. But there's no denying that, at 20% of its current market capitalization, we're talking about a huge potential cash drawdown that has understandably shaken some investors.
Demitrios Kalogeropoulos has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.