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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerA fair amount has already been written about the fact that since the recent IPO, content delivery network Limelight (NASDAQ: LLNW) has dropped sharply in price. In about three months, the stock has gone from $24.33 to $7.91.
But, how could something like this happen? In some ways it is, to used an abused phrase, a perfect storm of events.
The market has assumed that content delivery networks are part of the wave of the future. The largest one, Akamai (NASDAQ: AKAM) had been a victim of the internet bubble. In December 1999, the shares were at $345 on the assumption that broadband would open a huge need for storage and moving content around the web. When the market collapsed, Akamai's shares were as low at $0.70.
But, because Akamai did hold on until the YouTube wave of online video streaming hit, its shares went from $11 in early 2005 to $50 last month.
Limelight, and one of its largest investors, Goldman Sachs (NYSE: GS) decided to cash in on the excitement around Akamai, and took the smaller company public. Certainly the IPO would be popular because of the tremendous excitement around audio and video streaming as companies including the TV networks and studios put their content online.
What Goldman may not have see coming was two things. The first was that the content delivery companies were in a dog fight over business. Prices were being cut, and this would lead to lower gross margins. At the same time, it appears that the amount of video streaming over the internet seems to slowdown.
When Akamai released its Q2 earnings, Wall Street was disappointed. The company's shares fell from $50 to $33 in three weeks. In sympathy, Limelight moved down as well.
Then, last week, Limelight announced lackluster results itself, and its stock fell even further.
Goldman Sachs and the market had made assumptions about the growth of CDN companies. They were almost completely wrong. Limelight investors paid a huge price.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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