Better Deal: Akamai or Limelight?
AKAM, LLNW

February 15, 2011

Akamai Technologies' (AKAM) stock price plunged late last week after fourth quarter (Q4) earnings were released. Limelight Networks (LLNW) stock price jumped today after Q4 2010 earnings were released yesterday. That would seem to indicate that Limelight is the better stock deal.

Both companies compete at helping other companies deliver content over the Internet. In addition to the basic service of accelerating the delivery of web pages, both are involved in cloud computing solutions and ad services. Akamai offers otehr value-added solutions like security.

Akamai is the much larger company, with Q4 revenues of $284.7 million; Limelight revenue was $55.2 million; those were records for both companies. Disclosure: I own some Akamai, but not Limelight, so for me the question might be, should I buy Limelight in addition to, or in place of Akamai? The stock movements would indicate Limelight, the smaller company, is moving in fast on Akamai's business.

Profits however, are mainly an Akamai story. Its Q4 GAAP net income was $52.5 million; non-GAAP net income was $76.5 million; EBITDA was $129.2 million; cash from operations was $110.4 million. So Akamai profits, by any measure, are near or above Limelight revenues. Limelight had a GAAP net loss of $6.3 million, non-GAAP net income of $1.5 million, and EBITDA of $8.1 million.

Using the measure that makes Limelight look best by comparison, EBITDA, let's look at the stock value. As I write Akamai is selling for $42.46 per share, giving it a market cap of $7.74 billion. Limelight is selling for $8.27 per share, giving it a market cap of $820 million. Taking market cap divided by annualized EBITDA, Akamai is at a ratio of 59.9. Limelight is at a ratio of 101.2.

The results are worse for Limelight if you look at other P/E type ratios (and if you use the conservative GAAP P/E, Limelight looks like a black hole).

I would argue that both Akamai and Limelight are overpriced stocks based on comparing the stock price to various earnings per share measures. Usually when stocks have high P/Es they have explosive growth rates that justify those stats. How does growth look?

Using Q4 2010 to Q4 2011 comparisons, Limelight had revenue growth of 64%; Akamai's growth was 19%, considerably slower. Limelight went from GAAP net loss of $9.7 million to a net loss of $6.3 million, not really that great on such a large revenue boost. Akamai GAAP net income was up 31% y/y.

All in all, the sector (there are a few other players besides Akamai and Limelight), while it may be a favorite of investment funds, has a lot of risk built into it right now. The sector is growing quickly, and is likely to accelerate along with the Internet. On the other hand much of that growth is already priced in. Limelight is growing revenue faster that Akamai, but Akamai has made it clear its interest is in profitable revenue. Limelight apparently is willing to pick up any revenue at all, but that gives it low margins, not what you want to see with a high-priced stock.

I reduced my Akamai holdings as it ran up in 2010. The stock I have now I bought for $17.56 per share in September of 2008 when everyone else was panicking.

From my conservative, value-oriented investing perspective, there are a lot better technology stock plays available now than either Akamai or Limelight. Because I already hold Akamai, and think it will justify its current price pretty well during the course of 2011, I am holding on to what I have. But I would not have a strong argument with anyone saying sell these stocks right now and buy stocks with good growth prospects and lower PEs.

Note that both companies are good companies with great management and technologies. My objection is not to the companies, but to the stock prices relative to proven profits.

William P. Meyers

See also: www.akamai.com ; www.limelight.com

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