Earnings

Critical Comparison: Limelight Networks, Inc. (LLNW) vs. Zillow Group, Inc. (ZG)

Limelight Networks, Inc. (NASDAQ:LLNW) shares are down more than -14.06% this year and recently decreased -4.29% or -$0.17 to settle at $3.79. Zillow Group, Inc. (NASDAQ:ZG), on the other hand, is up 9.87% year to date as of 02/13/2018. It currently trades at $44.76 and has returned 2.15% during the past week.

Limelight Networks, Inc. (NASDAQ:LLNW) and Zillow Group, Inc. (NASDAQ:ZG) are the two most active stocks in the Internet Information Providers industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect LLNW to grow earnings at a -3.00% annual rate over the next 5 years.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 10.41% for Zillow Group, Inc. (ZG). LLNW’s ROI is -5.90% while ZG has a ROI of -7.40%. The interpretation is that LLNW’s business generates a higher return on investment than ZG’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. LLNW’s free cash flow (“FCF”) per share for the trailing twelve months was -0.07. Comparatively, ZG’s free cash flow per share was +0.35. On a percent-of-sales basis, LLNW’s free cash flow was -0% while ZG converted 6.14% of its revenues into cash flow. This means that, for a given level of sales, ZG is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. LLNW has a current ratio of 2.00 compared to 6.40 for ZG. This means that ZG can more easily cover its most immediate liabilities over the next twelve months. LLNW’s debt-to-equity ratio is 0.00 versus a D/E of 0.14 for ZG. ZG is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LLNW trades at a forward P/E of 20.16, a P/B of 2.89, and a P/S of 2.32, compared to a forward P/E of 38.03, a P/B of 3.12, and a P/S of 8.45 for ZG. LLNW is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. LLNW is currently priced at a -38.17% to its one-year price target of 6.13. Comparatively, ZG is -8.86% relative to its price target of 49.11. This suggests that LLNW is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for LLNW and 2.40 for ZG, which implies that analysts are more bullish on the outlook for ZG.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. LLNW has a beta of 2.15 and ZG’s beta is 0.94. ZG’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. LLNW has a short ratio of 0.53 compared to a short interest of 8.14 for ZG. This implies that the market is currently less bearish on the outlook for LLNW.

Summary

Limelight Networks, Inc. (NASDAQ:LLNW) beats Zillow Group, Inc. (NASDAQ:ZG) on a total of 8 of the 14 factors compared between the two stocks. LLNW generates a higher return on investment and has lower financial risk. In terms of valuation, LLNW is the cheaper of the two stocks on an earnings, book value and sales basis, LLNW is more undervalued relative to its price target. Finally, LLNW has better sentiment signals based on short interest.

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