Ariel's Run for the Roses Faces Steep Hurdles
By Mark Martinez
Staff Reporter
11/26/99 6:25 PM ET
SAN DIEGO -- As Ariel (ADSP:Nasdaq) shares were off to the races on Friday, at least one short-seller -- supported by some recent filings -- insisted that the company's fundamentals wouldn't allow him to place bets for this horse at these odds.
And quite a race it's been. On Friday, traders continued to bid up Ariel, which opened at 3 9/16 on Wednesday morning and closed that day at 10 3/4. Friday, Ariel reached an intraday high of 57 before closing at 36 5/8. Friday's volume was huge, as more than 49 million shares traded hands, making Ariel the most actively traded stock Friday.
Ariel, based in Cranbury, N.J., is a maker of remote access cards used by Internet service providers.
So what gives? In a release, the company on Wednesday said it was granted certification on its "PCI-based RS4200 remote access card." In that same release, the company said the card will work on the Windows NT system and Linux. The card, which is plugged into a computer server, is used by Internet service providers to answer incoming calls from users who are then sent to the Internet.
A few things to note when considering its current stock price. First, the fact of RS4200's existence is not news. Ariel put out a news release six weeks ago announcing the product. What's new is that the product has gained certification from the Federal Communications Commission, something that is a standard requirement for modem devices. Ariel also said that it was granted approval for other countries as well.
Second, it's got some tough competition in the form of Cisco (CSCO:Nasdaq), Lucent (LU:NYSE), and 3Com (COMS:Nasdaq). In its release, Ariel says its product is cheaper than the competition.
But one short-seller contends that it's not going to be easy to convince ISPs to dump the equipment they've already invested in. Further, at a time when more users are going to DSL and other broadband solutions, Ariel's product targets the increasingly passe 33.6K, 56K, and basic rate ISDN modem market, the short-seller points out.
Finally, a look at the company's recent 10-Q filing suggests that over the next 12 months, Ariel could have difficulty generating sufficient cash flow to cover its bills: "The Company expects to incur costs and expenses in excess of expected revenues during the ensuing 12 months as the Company continues to execute its business strategy in the Internet Service Provider (ISP) and Original Equipment Manufacturer (OEM) markets," the 10-Q says.
Ariel's filing, effective Sept. 30, disclosed that it had $4 million in working capital at the end of the quarter. It reported $3 million in negative cash flow last quarter, which suggests it's running through an average of about $1 million per month. The revenue for the period was $2.9 million.
During its five-year history as a publicly traded company, it has racked up hefty losses. Ariel has $25 million in net operating loss carryforwards on its books (meaning any profits could be offset against those losses for tax purposes).
Ariel officials did not return calls seeking comment. Ariel did release a statement saying it had no pending announcements explaining the activity in the stock.
One trader had an explanation for the sharp price hike, which puts the stock at 29 times sales: momentum.
"The story, the fundamentals, etc., in the short term are irrelevant," says James De Porre, a full-time trader from Anna Maria Island, Fla., who has no position in the stock.
"There [are traders] that don't care what the story is; they play it as long as the frenzy exists. ... They simply know that money is pouring in and driving the stock. They just want to make sure they aren't the last guy holding the bag." (Please see our related story on momentum.)
Most of the trading that occurred in Ariel over the past few days was in the form of 100- to 1000-share lots, suggesting that retail investors were responsible for the stock's action.
Meanwhile, De Porre says, short-sellers are probably getting their heads handed to them. "A lot of people are getting killed trying to short that thing."
The short-seller, who spoke on the condition of anonymity, said he received a $50,000 margin call this morning from a representative at E*Trade (EGRP:Nasdaq), where he does his trading. "I will make my margin call and I will still make my money when the stock returns to 3. I firmly believe the stock will be back down next week.
"The announcement by Ariel this week is much ado about nothing. The products they make are obsolete and unwanted," said the short-seller. He added that he tried to get short another 5000 shares at 35 but that the order didn't get filled.
Time will tell whether he'll be disappointed, or thankful.
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