Akamai Set for A Breakout

On Friday, we relayed the news that One-rated Akamai Technologies (AKAM Quote) had prevailed in a patent case against Limelight Networks (LLNW Quote). Now I'd like to give readers an in-depth look at the implications of this news for this Breakout Stocks holding.

To recap, on Friday afternoon a jury in the U.S. District Court of Massachusetts ruled that Limelight infringed on an Akamai patent that covers certain technologies related to content delivery via the Internet. The jury awarded Akamai $45.5 million in damages, and we fully expect Limelight to appeal the verdict as it believes it did not infringe on Akamai's patent.

In our view, the financial damages are not that big of a deal for Akamai. The company has $433 million in net cash on its balance sheet and generated $55 million in free cash flow during the fourth quarter of 2007, so the money doesn't really move the needle for it. In any case, the impact of legal expenses will likely offset the gain of any settlement. However, there are several positive implications from the decision that further reinforce our bullish stance on Akamai.

First, this verdict has absolutely crushed Limelight's stock price, taking it down more than 25% from Thursday's close, and has brought the company's market cap down to about $350 million. This is a big positive for Akamai because this decline makes Limelight, Akamai's biggest competitor, a fairly attractive takeover target for Akamai.

While Limelight's margins are lower than Akamai's due to Limelight's dependence on media customers, it does have a $197 million in cash and an attractive customer base made up of names such as Microsoft(MSFT Quote), Facebook, Amazon.com(AMZN Quote), General Electric's(GE Quote) MSNBC unit and DreamWorks Animation(DWA Quote). In addition, Akamai has a much broader suite of services, which it could sell to any newly acquired customers.

Second, while Limelight has been the subject of takeover rumors on a fairly regular basis since it came public last June, this legal loss greatly minimizes the chance that companies like Level 3 Communications(LVLT Quote) or AT&T(T Quote) will step in to buy Limelight. Given Akamai's upper hand on the legal front, it probably wouldn't face much competition in getting its hands on Limelight.

In the meantime, we believe Friday's ruling gives Limelight a significant disadvantage when it comes to seeking out new business, as potential new customers may not want to take the chance of seeing Limelight's operations interrupted because of legal problems.

As such, the pricing environment would likely become more favorable for Akamai, especially in the media space, where margins are lower than in areas such as Web application acceleration and Internet retail. In these areas customers are more likely to see an immediate return on investment via improved performance.

We continue to view Akamai as a top play within the Internet space, and this legal victory only increases our confidence that the stock will significantly outperform the market.

Michael Comeau manages TheStreet.com Breakout Stocks service and regularly writes about equities that are poised for large growth, such as Akamai Technologies(AKAM Quote), GameStop(GME Quote) and Perfect World(PWRD Quote), for TheStreet.com.