MomentumOptions.com Mid-Market Update for 10/26/2017
Limelight Networks in the Spotlight
Limelight Networks (LLNW, $4.90, up $0.02) is a developer of content delivery network (CDN) for online media and was founded in 2001. The company went public in June 2007, raising $240 million in its initial public offering (IPO) after selling 16 million shares at $15. The company has a number of big-time clients that include DirecTV and Nintendo along with a previous relationship with Netflix that I would love to see reestablished at some point in the future.
The market cap for Limelight is at $535 million so this is a small-cap company relatively unknown to Wall Street. There are 15 analysts that cover the stock with 1 Strong Buy; 2 Buy ratings; 3 Holds; 4 Underperform ratings; and 5 sell ratings.
For the most recent quarter, Limelight reported a profit of $0.02 a share on revenue of $46.1 million. This topped expectations for flat earnings, or $0.00, a share with revenue topping the forecast of $43.1 million. It was the third-straight quarter with a 2-cent beat, including a penny beat prior to that.
Shares recently spurted to recent 52-week highs with last Monday’s peak reaching $5.18. The chart below shows the strong breakouts above $3.80 and $4.40. A solid base of support has been building this month at the $4.40-$4.20 level. The major moving averages are in a solid uptrend and current momentum could carry shares toward $6+ on continued closes above $5 over the near-term.
Limelight has been involved with patent disputes with rival Akamai Technologies (AKAM) over the years with the last coming more than a year ago. The company had to pay a $45.5 million patent verdict over technology related to content delivery after a Federal Circuit ordered the judge in the Massachusetts case to reinstate the 2008 jury verdict against Limelight. While there could be litigation in the future over patent disputes, things between the two companies have simmered down.
Limelight has won lawsuits against Akamai in the past, as well, so I don’t see this as a near-term risk. The companies are currently targeting different customers with Limelight focusing more on media delivery customers while Akamai refocuses on security and high-performance services.
The bigger story though, is the longer-term chart and the possibility of a takeover offer. First, the chart work. As you can see, the 3-year chart shows continued closes above $4.50 on a weekly basis would be bullish and a level I’m looking to hold as support on any pullbacks. There could be stretch to $4.40-$4.20 on a move below this level as demonstrated by the previous chart. Longer-term resistance is at $6-$7 and why I believe these levels will easily come into play on continued strength in the stock over the near-term.
If shares can clear $6 by mid-December, the LLNW December 4 calls (LLNW171215C00004000, $0.95, flat) will double from current levels as the options would be at least $2 “in-the-money”. This would be just over a 100% return, if met.
Of course, any breakout above $5 could have the trade pushing a three, five, or even a “tenbagger”. In fact, if shares clear $7, by mid-December, the calls would be worth at least $3 and would represent more than a 300% return, or “threebagger”, from current levels.
If shares happen to clear $7.70, the aforementioned call options would be $3.70 “in-the-money”. This would be 10 times the recommended price of 37 cents, or a tenbagger, a term coined by legendary fund manager Peter Lynch and big-time baseball fan. Our current trade is up triple-digits but I’m hoping it becomes the biggest trade of the year for us. Full disclosure, I own 50 contracts at the recommended price.
Lynch used the term tenbagger to describe stocks with explosive growth prospects but I often talk about how options can be so much more powerful than stocks. For instance, to buy 1,000 shares at LLNW, the current outlay would be nearly $4,900. If shares trade to $9.80, the return would be 100%.
Now, to control 1,000 shares of LLNW, all you would need to do is buy ten call options. Each option contracts controls a 100 shares of stock. With the LLNW December 4 calls, 10 contracts at current levels, or 95 cents, would cost $950. If shares do trade past $6 by mid-December, the 10 aforementioned call options would be worth $2 apiece, for a total value of $2,000.
As far as a possible takeover candidate, Tuition Build, a Silicon Valley private equity company, submitted a $645 million hostile takeover bid a few years ago for Limelight Networks. Tuition Build wanted to take Limelight private with the takeover offer representing $6.55 per share. The stock was trading just under $3 at the time of the announcement and closed at $2.83.
The deal could have been worth up to $6.70 a share for a total of nearly $660 million, if certain financial thresholds were met, but Limelight rejected the proposal. Fast forward to now and four years later, shares haven’t budged much if you take away the recent breakout. This is why I believe there is hidden value as the company was losing money then, but its turnaround efforts are finally starting to pay off.
Losing Netflix in 2013 was a huge pill to swallow as they accounted for 40% of Limelight’s traffic at one point. Perhaps Netflix could make a bid for the company, but this of course, is pure speculation on my part.
My expectations for Limelight Networks, and a possible $10 target in 2018, might be still a tad high but a stock price north of $6 by mid-December without a takeover offer is certainly doable. With solid earnings out of the way, this headline risk is removed until the yearend and their numbers have been solid.
At current levels, I still like the risk/ reward setups for both the stock and the options.
As far as the market, the Dow is up 96 points to 23,425 while the S&P 500 is gaining 6 points to 2,563. The Nasdaq is higher by 2 points to 6,565 and the Russell 2000 is advancing 5 points to 1,499.
Momentum Options Play List
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Ford (F, $12.19, up $0.15)
November 12 calls (F171117C00012000, $0.35, up $0.05)
Entry Price: $0.45 (10/11/2017)
Exit Target: $0.90
Stop Target: None
Action: Resistance is at $12.15-$12.20. Support at $12.10-$12.
Limelight Networks (LLNW, $4.90, up $0.02)
LLNW December 4 calls (LLNW171215C00004000, $0.95, flat)
Entry Price: $0.37 (9/21/2017)
Exit Target: $1.20 (Limit Order on half at $1.20)
Stop Target: 75 cents (Stop Limit)
Action: Resistance is at $5-$5.25. Support is at $4.75-$4.70 on a close below $4.90.
TherapeuticsMD (TXMD, $4.59, down $0.3r)
TXMD December 7.50 calls (TXMD171215C00007500, $0.20, down $0.05)
Entry Price: $0.95 (8/17/2017)
Exit Target: $1.90
Stop Target: None
Action: Support is at $4.50. Resistance is at $4.70-$4.75.