actualy Jane I have not issued my report on HSNS as of yet. I was busy on another report. I have time now.
TheTruthseeker.com reaffirms our SELL RECOMMENDATION on Ariel Corporation, (NASDAQ:ADSP), and places an intermediate-term price target of 2 dollars, with highly volatile strong downward price pressure in the immediate/near term timeframe.
Investing in ADSP, at these levels, is much akin to stepping into a Quicksand trap. Long-term investors need to be aware of the risks before they become "STUCKHOLDERS" sinking within the trap. The actions of ADSP stock over the last two trading days, makes this Investment of the HIGHEST RISK
to any serious investors and current stockholders. ADSP will rapidly join the ranks of other 1-3 day
"wonders"
This report is extensively detailed to explain the "wonder" but cutting to the bottomline:
TheTruthSeeker maintains our HIGHEST WARNING to Investors, and maintains
our STRONGEST SELL RECOMMENDATION on Ariel Corporation, (NASDAQ:ADSP)
The huge interest in Ariel on Friday was related to the
perception that any company in the area of wireless Internet connections
will benefit from the possibility of AT&T doing an initial public
offering of its wireless unit. Mondays reality for Daytraders is that Ariel isn't in that
business. It provides "remote access" products -- but not wireless
equipment
In light of recent attention drawn to the company by its press releases, as
well as frantic trading in this stock last week, it seems timely to review
and summarize our findings with respect to this company's valuation and
prospects. Details for each point are provided below:
* The company's product is NOT wireless technology, rather obsolescing
56K dial-up modems
* A case of mistaken identity may have misled some investors
* The company's product is NOT new, just an incremental upgrade
* Long history of deal announcements, but no corresponding revenue
* The product serves a shrinking niche market
* ISP's perceive many disadvantages to the company's product compared to
competition
* The company's latest product was introduced over 6 weeks ago -- with no
market reaction
* The company's "certification" announcement is not materially
significant
* The company's products are OEM'd from another manufacturer, not made by
the company
* "Linux compatibility" is not material to the company's prospects for
selling its product
* The company is in deteriorating financial condition
* Recent day-trading and market manipulation excesses are not an
indicator of value
* The company has no material news pending with regard to recent stock
price movement
* The company product IS NOT wireless technology
Ariel's product is a two-card kit that installs in the PCI slots of a
Windows-NT or Linux PC to support up to 96 dial-up modem sessions from a T1
line connection. Ariel's PR calls their product a "remote access
solution", but their website describes their products as "modem pool
cards". Ariel Corporation
Definitely a less sizzling-sounding description of the same product. This
technology is obsolescing rapidly -- most demand for technology connecting
computers to networks is in broadband (ADSL, cable modems, satellite) or
wireless, not dialup 56K modems or ISDN.
A few news organizations, including CNBC, incorrectly reported Ariel's
product to be related to wireless communications, which appeared to
stimulate momentum buying. Two months ago, Ariel announced the Aviation
Communications Division of AT&T's Wireless Services had selected its
product for one of its projects, but this was for its existing product
only; there is nothing in the release associating Ariel with any wireless
technology.
* Mistaken identity?
In fact, we believe some hasty investors may have mistaken Ariel's business
sector for that of Aeriel Communications (NASDAQ:AERL) an unrelated
company, who is truly a wireless services provider.
* Ariel's product is not new
Ariel's recently announced RS2400 (which is still under development
according to company statements) supports up to 96 dial-up or ISDN modem
connections or ports. Its prior products, the RS2000 and RS1000, support
30 or 60 ports. (see Ariel product page link, above) In fact, the
descriptions of the company's technology in a May 1998 Press Release sound
identical to its new product: "Ariel Corp. offers the industry's highest
density and most cost-effective remote access data solutions for open
systems platforms ... PC-based modem pools which support 56-kbps, v.34+ and
ISDN remote access sessions, connect to T1, E1, ISDN and POTS lines."
This hardly makes the new product revolutionary; it is merely an
incremental upgrade of existing products. Note that sales of these
products over the last year have been paltry, less than $1 million per
month, and declining year over year. It is unlikely that the increase from
a 60 to a 96 port card kit will drastically reverse this pattern.
* Long history of deal announcements, but the revenue never came
Ariel's 30 port product has been available since late 1997.
In late 1997, the company announced all the following deals based on 30 and
60 port products: Modem pools-9/29/97
In early 1998, Dow Jones reported the company was riding high, on the
promise of "significant contracts from major computer manufacturers." Raging Bull ADSP Post #1647
(Note that in its most recent 10-Q, the company attributes shrinking
revenues to the termination of an OEM agreement with Compaq.) "Analyst
Anthony Stoss," (best known for his prediction that the resignations of all
the officers at Source Media was great news -- harbigers of its long
promised deal with TV Guide. Instead TV Guide sued, and Source Media is
nearly bankrupt), was actively touting the company's impending sales boom.
(Note that Stoss's firm brought Ariel public.) These "analysts" predicted
Ariel would bury Ascend's more expensive product. Now they claim it will
blow away Cisco's, Lucent's and Nortel's routers on price.
Instead, of course, Ascend was purchased by Lucent for $20 billion in
stock, while Ariel's stock eroded from a high of 11 to 2 by the end of 1988
as its sales never materialized and earnings disappointments mounted.
Its 1998 annual revenue was only $17.4 million, and declined 30% to appx $1
million per month so far in 1999. Now its two years later, the industry
has shifted to broadband technologies (cable modem and ADSL) and Ariel's
only product is essentially the same 1997 product with 96 ports. How can
anyone believe sales are about to skyrocket?
* Ariel's product serves a shrinking niche market
In a recent interview, Ariel's director of marketing estimate an impressive
sounding number of new ports expected to come online this year. But he
also admitted that Ariel's products are marketed to "smaller ISP's," for
whom a lower price point per port may be appealing. Note that the ISP
industry is quickly consolidating, with smaller ISP's numbers dwindling
rapidly as they are being absorbed into larger and more competitive
regional or national ISP's. Smaller ISP's comprise only a very small share
of the estimated new ports. For larger ISP's, Ariel's product is not
scaleable, and therefore not even considered. Under these circumstances,
it is absurd for Ariel to suggest that it will compete with Cisco, Nortel,
Lucent and others.
* ISP's doubt Ariel's product can compete with mainstream routers
Owners of ISP's we interviewed stated deep skepticism about PC-based router
solutions due to maintenance costs, security and performance. A PC
platform is a more complex and higher cost foundation to maintain compared
to a standalone router, and tougher to protect from hackers. They
believed the marginally lower per-port cost of Ariel's solution would
likely be dwarfed by higher maintenance costs. Concerns about performance
were also expressed, since many functions are left to the operating system.
Ariel's claimed $100 per port cost advantage overstates the saving by
leaving out the cost of the PC and its higher maintenance, infrastructure
and programming costs.
* The news which propelled Ariel's stock last week is not new
News of Ariel's RS2400 product is not new; in fact, the company announced
the product, its price and capacity in a press release dated October 18,
1999. As far back as April 27, 1999 it announced its intention to partner
with Red Hat for the purpose of hosting its PCI card solution on LINUX
computers. During the six month period prior to its press release of
Wednesday, November 24, ADSP traded in the range of 2 - 5 dollars per share,
and the product news obviously had no material effect on the share price
during that entire period. Where are the revenues?
* Certification is not newsworthy
The press release of November 24 is "manufactured news," containing no new
information, except that the previously announced product has "won
certification" for connecting to digital telephone networks. Note that
this certification is entirely routine for telephony products; in fact, no
switching product that connects to a telephone network is saleable at all
without it. All major companies who produce telephony-based technology
must obtain independent certification of their products, and they do so
daily, without generating press releases for each certification. Imagine a
mainstream computer maker announcing their product won "UL" approval and
could now be safely plugged into household electric outlets. This type of
PR is inexpensive advertising, but ludicrous as news.
* LINUX compatibility is not material
While LINUX software firms are getting a lot of attention from investors,
LINUX support will not drive sales of Ariel's products. The competitor in
this case is not another software platform, but standalone routers from
Cisco, Nortel, 3Com, Lucent, and others, which have established the
standard in the market. All but the most marginal ISP's base hardware
decisions on maintainability and reliability, because those costs will
quickly dwarf the cost of committing capital. If ISP's continue to resist
adopting PC-based routers, as they have done to date, it does not matter
what operating system the PC-based router runs.
* Ariel's product is OEM'd from another manufacturer
Ariel has no capacity to manufacture any of its products and is simply
repackaging a product made by Mapletree Networks Inc., which can be OEM'd
by anyone!
Mapletree's website gives a product description identical in many details
to Ariel's. The product is clearly being offered to other companies on an
OEM basis. Ariel claims only one patent-pending for its software
architecture; in fact, Mapletree claims the patent-pending on the
"Uniporte" design promoted in both companies' PR. If there were enough
demand in Ariel's market, larger, better funded companies could easily
compete for market share. With Ariel making sales of barely $1M per month,
they won't even bother. Should the market for this product grow
substantially, there is no significant barrier to entry for other firms
wishing to compete. 2100 Series UniPorte PCI Adapter Card
* Ariel is cash poor and in worsening financial condition
The final and most significant point is that Ariel is drowning in red-ink
and is almost out of cash based, on their most recently filed 10-Q.
On November 15, it reported sharply declining sales for the most recent 9
month period compared with last year. International sales, claimed to be a
viable outlet for its current product, produced less than $1M in the last 9
months. It reported spending a total of only $4,230,325 on Research and
Development, which also declined (23%) from the prior year. (This is a
minuscule sum compared to competitors like Lucent and Cisco with which it
compares itself.) Cash and cash equivalents have fallen by 2/3 since the
beginning of the current year, from appx. $18 million to appx. $6 million,
and it is currently burning cash at the rate of $1 million per month.
Ariel has had to renegotiate its debt twice this year to avoid and/or
resolve violations of debt covenants.
Ariel's 10-Q states "There is no assurance that the Company will generate
sufficient cash flow from operations to liquidate liabilities as they come
due. In the event that the Company is unable to liquidate its liabilities,
it may delay or eliminate some expenditures and planned operations may be
scaled back. Accordingly the Company expects that it will need additional
funds to meet obligations through the next twelve months and will seek to
raise such amounts through a variety of options including expected future
cash from operations, borrowings, proceeds from equity or debt financing
and scaling back operations.
Additional funding may not be available when needed or on terms acceptable
to the Company, which could have a material adverse effect on our business,
financial condition and results of operations."
* Day-trading excesses are not to be misunderstood as valuation of the
company
Day-traders noticing the company's impressive-sounding PR, and spurred by
the erroneous reporting of CNBC mentioned above, drove the price of ADSP
from appx. 4 dollars to 10 on Wednesday, the day before Thanksgiving.
Then, in the confines of post-market and pre-market trading, it gapped to
over 20, setting up a powerful short squeeze which was executed by
professional market makers during the first hour of the short
post-Thanksgiving trading day Friday, driving the price to 55, after which
it collapsed to the low 30's before closing at 37.
It is interesting to note that these short pre-holiday / pre-weekend
trading sessions are notorious for market manipulations, because many of
the pro traders are not at their desks. Exactly one year ago, the shares
of Books-a-Million (NASDAQ: BAMM) were driven from 4 to 48 dollars over the
day before and day after Thanksgiving, on news that the company had
"revamped its website for improved usability." We believe BAMM's chart
indicates a pattern strikingly similar to Ariel Corp. By mid December,
BAMM's stock had fallen 10, causing huge losses for all investors who
bought into the rapid run-up. BAMM has since traded in single digits for
most of the year, except for occasional unsustainable spikes. The short
squeeze effected in BAMM was hauntingly similar to last week's action in
ASPD, and we believe ADSP's share price prospects going forward are similar
too.
* The company has no material news pending with regard to recent stock
price activity. In light of the dramatic run-up of ASPD's stock price, NASDAQ required the company to state whether there was material information that was connected to the stock movement. The company affirmed that there is no pending
announcement to explain the stock activity.
Conclusion:
This is a tiny, financially weak company with a single outdated product,
which it buys and OEM's, rather than owns outright, and a long history of
failing to sell it, trying to repackage it using whatever hot buzzwords
attract attention. It serves a small niche market, but it is improbable
that it will ever compete with standalone routers manufactured by companies
thousands of times its size, with thousands of times its R&D budget.
Instead it will soon run out of cash.
Its stock ran merely on a combination of erroneous media coverage, a
possible case of mistaken identity, daytrader mania around a holiday, and
marketmaker manipulation, but has little or no underlying value or the
market opportunity for enough growth to make it profitable. For a
projection of the outcome for the stock price, consult the chart of BAMM
for the Thanksgiving period last year, or any other pump and dump spike
since then.
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