MICROCAP JOURNAL: Socket Communications
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Analyst: Adam Lowensteiner (6/29/99)
Socket Communications (OTC BB: SCKT - Quotes, News, Boards) has been working on connection solutions for the Windows CE market for over three years, but the market did not fully comprehend that until Microsoft (NASDAQ: MSFT - Quotes, News, Boards) specifically mentioned Socket by name in a press release.
Socket's stock soared 146% to $1.38 a share just on the mention alone, with volume clocking in at 1.7 million shares, vastly above the average daily volume of 30,000 shares. The stock has since pulled back to $1.19.
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Socket went public back in June of 1995 at $12 a share, and since then the company has gone through some cash constraints, issuing several classes of preferred stock, as well as getting delisted from the Nasdaq Small Cap for insufficient capital. But with a new line of product about to erupt from companies like Motorola (NYSE: MOT - Quotes, News, Boards), Nokia (NYSE: NOK/A - Quotes, News, Boards), and Ericsson (NASDAQ: ERICY - Quotes, News, Boards), Socket could well be a rewarding penny stock.
New portable systems, which use Windows CE, may bring the company to profitability. The simplest way to define these new hand-held machines is to picture a hybrid component between a cell-phone and a hand-held computer device. These devices will enable people to e-mail or fax information.
What Socket supplies are connection solutions for these handheld computers that use Windows CE. Socket offers an array of plug-in adapters, which can connect two peripherals, like a cellular telephone with a portable PC. Once connected, users can use their handheld devices as a full functioning system. 'It is like the last leg of the mile,' noted Mike Gifford, executive vice president of Socket, referring to his company's product in relation to what regional bell companies offer their customers, but in handheld devices.
The uses for Socket's products don't end there. The company has also defined that the data collection market can use Socket's product, especially within handheld devices used to do inventory checks in large superstores. The paging market is another area Socket's products could be used, as there are pagers that can now be used to receive and send messages or e-mails.
Socket is relying on several catalysts in order to reach profitability. One of those catalysts is the immediate acceptance of the handheld devices. If the new products coming from companies like Motorola are eventually accepted, Socket could be marginally profitable even this year. 'We expect 100-200 million handsets to be sold this year and next year,' said Gifford. 'It's a big market and should drive sales,' he added.
If there is anything Socket has done right in recent weeks it is increase its earnings visibility by announcing deals with Microsoft, Unisys (NYSE: UIS - Quotes, News, Boards), and Bell Mobility.
Despite revenue jumping 24% in the first quarter, Socket still burned $457,000, including dividends paid for preferred stock. The company carries only $567,000 in cash on its balance sheet, and $18,749 in accumulated deficit. The company will likely need additional funding this year to take it to profitability (which might not come until later in the year when these new devices enter the marketplace).
But being in bed with Microsoft, which had more than $20 billion in cash as of last quarter, could benefit Socket, especially if the software giant 'feeds Socket by hand.' '[Microsoft has] not yet taken a stake in the company,' said Gifford coyly.
Regardless, Gifford is confident that his company will be profitable this year, and could even do close to $7 million in sales. Socket lost $0.06 a share in the first quarter, so it would have to have a solid back-ended year to pull off profitability. The Socket story really should mature next year, when the company could earn an estimated $0.15 a share, making Socket's $1.19 a share stock trade for 7.9 times that estimate.
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