Cart (0)
business newsWill Acme Packet Ever Offer an Attractive Entry Point?
By
Fil Zucchi
Feb 08, 2012 11:00 am
Acme Packet's post-earnings stock move seems straight out of bizarre-land.
PRINT
A funny thing happened on Acme Packet’s (APKT) way to its latest earnings. It began several quarters ago, and it went something like this:
Call it "double reverse psychology," mind games, or simple craziness, but it had the desired effect: Give nonguidance guiding to no growth despite suggestions that the business will grow, and they will not believe you or not understand you or there won’t be anyone left to be disappointed.
However, looking at Acme Packet’s business, rather than just how the stock moves, the picture is quite different. There are two primary problems in front of Acme Packet. First, the bulk of its business depends on wireless carriers switching over to all-IP networks, i.e., Long Term Evolution (LTE); and second, once that happens, it remains to be seen if the providers of wireless network equipment, with which Acme Packet is currently in “coopetition,” decide to play nice and to continue incorporating Acme Packet’s solutions in their broader offerings.
On the first issue, anecdotal evidence is beginning to point toward the second half of this year as the bona fide beginning of broad-based rollout of LTE. For example, today Procera Networks (PKT) noted that it is beginning to receive RFPs from wireless carriers for their offerings (which are very much related to Acme Packet’s products) for the second half of 2012. So in a vacuum, one could look through the next couple of quarters and discount a pickup in business.
But the second issue is a lot trickier. This is verbatim from Acme Packet's earnings call:
Perhaps Acme Packet’s distribution strategy will continue to work in the wireless arena, but let us not kid ourselves, the size of the SBC opportunity in the wireless market is a lot bigger than what it was in the wireline space, and this time around other vendors may not be so inclined to share it.
These issues and Acme Packet’s $35 share price leave the stock in no man's land. Even if Acme Packet is sandbagging estimates to the tune of 30%, it is still not attractively priced; and if it is not sandbagging, once the crowds catch on to that, they are likely to pound the stock into the teens in a matter of hours. I suppose the short-term technical breakout above the 20- and 50-day moving averages, together with a high short interest (10%), can be enough of a brew for a rip higher, but that’s living dangerously to say the least.
As I buzzed before (subscription to Buzz & Banter required), I would like to own Acme Packet because it is in a soon-to-be-hot market, and it is a pure play on SBC technology, which gives the company scarcity value. But as has been the case for many months now, it simply does not look like this stock is willing to offer an attractive entry point.
Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of “DeMark” indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
- Management takes guidance down and the stock tanks;
- Management takes guidance down a second time and the stock tanks;
- Management takes guidance down a third time and the stock tanks;
- Management misses the latest downward revised guidance and prior to the conference call the stock tanks again;
- On the conference call management tells sell-side analysts that their business will grow around 20% for fiscal year 2012 but their revenues will not, and the sell side should assume no meaningful revenue growth until the second half of the year; and even then management’s official guidance is that they have no idea whether there will be any growth;
- The sell side, at least judging by their questions, is utterly confused, and as you can see from the trend of earnings estimates in the chart below, “they won’t get fooled again.” For its part, the buy side concludes that management is sandbagging them, and that there will be revenue growth -- at some point. The next day the stock takes off and has hardly looked back since then.
However, looking at Acme Packet’s business, rather than just how the stock moves, the picture is quite different. There are two primary problems in front of Acme Packet. First, the bulk of its business depends on wireless carriers switching over to all-IP networks, i.e., Long Term Evolution (LTE); and second, once that happens, it remains to be seen if the providers of wireless network equipment, with which Acme Packet is currently in “coopetition,” decide to play nice and to continue incorporating Acme Packet’s solutions in their broader offerings.
On the first issue, anecdotal evidence is beginning to point toward the second half of this year as the bona fide beginning of broad-based rollout of LTE. For example, today Procera Networks (PKT) noted that it is beginning to receive RFPs from wireless carriers for their offerings (which are very much related to Acme Packet’s products) for the second half of 2012. So in a vacuum, one could look through the next couple of quarters and discount a pickup in business.
But the second issue is a lot trickier. This is verbatim from Acme Packet's earnings call:
Q: “So basically, in Mobile IMS, when you go in that type of deployment, you may see both kind of the end-to-end where there is just one provider or one vendor supplying all the pieces of the puzzle, or some providers may be being more selective where they choose Acme Packet being the best of breed in the SBC (Session Border Control) world and then all the other components of that network would go with the big vendor, such as Ericsson, Alcatel, or NSN?”
A: “That – what you just said is no different than our core historic wireline business over the last five years.”
A: “That – what you just said is no different than our core historic wireline business over the last five years.”
Perhaps Acme Packet’s distribution strategy will continue to work in the wireless arena, but let us not kid ourselves, the size of the SBC opportunity in the wireless market is a lot bigger than what it was in the wireline space, and this time around other vendors may not be so inclined to share it.
These issues and Acme Packet’s $35 share price leave the stock in no man's land. Even if Acme Packet is sandbagging estimates to the tune of 30%, it is still not attractively priced; and if it is not sandbagging, once the crowds catch on to that, they are likely to pound the stock into the teens in a matter of hours. I suppose the short-term technical breakout above the 20- and 50-day moving averages, together with a high short interest (10%), can be enough of a brew for a rip higher, but that’s living dangerously to say the least.
As I buzzed before (subscription to Buzz & Banter required), I would like to own Acme Packet because it is in a soon-to-be-hot market, and it is a pure play on SBC technology, which gives the company scarcity value. But as has been the case for many months now, it simply does not look like this stock is willing to offer an attractive entry point.
Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of “DeMark” indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
Position in PKT
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
