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Top Spec and Tech for 2013: Acme Packet

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The following is a sample report of Sean's TechStrat Report that was written on December 31, 2012

With Stifel Nicolaus upgrading Acme Packet (APKT) to a buy from hold today - a position they've held for nearly six years - I wanted to readdress one of my top picks for 2013.

Yes you all are reading that right, Acme Packet (APKT) is a Top Tech and not just a Top Spec. The reason here is simple. I believe APKT is going to be a notable earnings growth winner and has two product cycles instead of just one to benefit from as I see the migration to 4G/LTE being as strong a catalyst as my renewed spending thesis on networking/high capacity bandwidth upgrades. In fact, we could see APKT produce two runs this year. The first half of the year could/should be driven by core networking strength, which re-ignites the core products in Acme's portfolio. The back half of the year should be driven by APKT growing orders and gaining share in core 4G investment/upgrades.

Even though different in industry, the catalysts here are similar to Facebook (FB), which also made both lists. Negativity got too extreme last year, valuation is not as rich as many think, and notable revenue and earnings acceleration are in the offing.

From a valuation standpoint, many point to a high P/E and that sort of short sighted view isn't going to work on this name. First, its not nearly as expensive as many claim as the company is only trading at 4X net cash, and roughly 4.5X revenues. That multiple on rev's is similar to Riverbed (RVBD) or RADWARE (RDWR). It's also lower than F5 Networks (FFIV), Citrix (CTXS) and much lower than names like Allot Communications (ALLT) or Procera Networks (PKT). And I'd argue that the EPS acceleration (and rev. growth) for APKT in the next 1-2 years should be higher than most, if not all of those names. Further, APKT has produced $1.00 plus in EPS before and I would be surprised if they don't materially exceed that level again. Thus, anything in the $1.20-1.50 area for EPS puts the PE is a very modest range for this name.

Bottom line, while this name is highly volatile, they have returned to earnings stability and maintained strong cash flow, while not having produced a notable upside quarter in over a year. When that upside quarter occurs, I expect the stock to retake the low/mid $30's. Then, if the back half produces the 4G spending in developed countries that I expect, we could see further gains from those mid $30's levels.

Twitter: @UdallTechStrat

The TechStrat Report by Sean Udall. Sean provides in-depth analysis, strategies and trades across the technology sector. Take a FREE 14 day trial.