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Time To Buy The IP Technology Companies?
The market has tumbled, Nasdaq has broken the 3000 support level, and the climate has never been worse for the High Tech and Telecomm stocks, so is this the time to buy? The forecasts for IP Telephony services, calling and technology have never been rosier then they are now, but you could not tell from looking at the stocks that comprise the sector. Revenues for the enablers of VoIP will exceed $4-6 billion in the coming year, according to several industry reports, and the companies on the Internet Telephony Index are poised to capture a large piece of that pie. Though the technology suppliers and the service providers have two different outlooks for their respective areas of the industry and part two of this article will follow with a look at the service providers.
The first companies discussed are ones that are notable are two that have faired the best for their returns on the year. RADVision(RVSN) is alone in the entire Index in having a positive return from the first day of trading this year. RVSN became a publicly traded company after their IPO in mid-March of this year. The initial offering price of $20 has the company up approximately 5%. RADVision has several factors in its advantage that have contributed to the vigor with which RVSN has held its ground.
A relatively small float of under 5 million shares and institutional ownership of a large percentage of the float has given a RVSN a solid base. Institutions added 1.6 million shares through September 30th and own over 25% of the outstanding 21 million shares. Another feather in the cap was that RADVision achieved operational profitability in its most recent quarter, prior to this period financial income had accounted for the whole of net income reported in the 2nd quarter. The wide array of uses that RVSN’s technology has been incorporated into provides a growing area of niche markets that can be addressed by RADVision and has been demonstrated by the addition of new clients.
Natural Microsystems(NMSS) was one of the hottest stocks on any exchange earlier this year, and enjoyed a spectacular year moving higher even as the market withered in April and September. NMSS finally succumbed to the weakness in late October as tax selling and profit-taking by institutional investors chopped the legs out from underneath. In the past two weeks, Natural Micro has been unable to regain any strength due to the poor atmosphere. Natural Microsystems however has been doing what they do best adding customers and partners to broaden the reach of their products and to increase the string of impressive quarterly numbers that were the catalyst for Natural Microsystems’s run earlier this year.
AudioCodes LTD(AUDC) has recently joined the ranks of the issues hurt by the freefall in Tech, being driven to new year lows on the heels of the two-for-one stock split enacted in October. This natural profit-taking point coincided with tax selling, leading to a short term decline that has lowered AudioCodes 50% below its year open price. Prior to the split, large investors added an additional 3.5 million shares to the already sizable holdings, owing almost 73% of the total shares outstanding in the company. AudioCodes also reported a 150% increase in profits in the last quarter and revenue growth to match. The increased liquidity of the stock split was necessary to allow new institutions to purchase positions at a reasonable price, something that had been impossible with the low float that was previously available. New blood is necessary for stocks to gain highs as the longer term owners do not supply the capital to keep shares on the move.
Clarent Corporation(CLRN) has dropped 80% from where it began trading for the year, and over 90% lower from the year high. Clarent has built the longest list of customers that includes many of the top international telco’s and ISPs. Clarent’s fiscal year should see sales exceed $150 million for calendar year 2000, and is on a steep curve upwards. The recent acquisitions of Act Networks and PEAK Software have increased the product line and personnel to implement large scale deployments of Clarent’s top flight technology and allows CLRN to leverage more products and services to the existing client base. While turning a profit has suddenly become important in the market and Clarent is still a ways off, Clarent is a growth play that is trading just above book value. Investors may be wary of catching a falling knife, and Clarent has just broken through new all time lows, but when shares do reach bottom, it will make a compelling opportunity to hold a company with some fo the best prospects in the market.
VocalTec(VOCL) has been treated as little more then a tracking stock for ITXC Corporation(ITXC) since ITXC became a publicly traded company. VocalTec sold a number of shares in ITXC’s secondary offering earlier this year, but still owns 4.8 million of ITXC with a market value of $44 million, compared to VocalTec’s $80 million market capitalization, Wall Street clearly has little of VOCL’s worth outside of ITXC factored into the share price. VocalTec has been making important strides in fulfilling the business plan set forth by management to increase the number of OEMs and to achieve greater penetration into the Asian communications area. With a pair of new customers in China and Telia’s selection of VocalTec’s Clearinghouse product, VocalTec has added new sources of revenue that should continue to bolster income. Two elements of VOCL’s strategy that will grow in significance are Surf & Call, an ASP platform already being deployed by Deutsche Telecom and the further development of Truly Global, a wholly owned subsidiary, provide a broader use of VocalTec’s pioneering technology that started the Internet Telephony industry four years ago.
NetSpeak Corporation(NSPK)is also an early mover in the industry but has fallen on to hard times, dropping to $6 a level shares haven’t traded at since fall of 1998. With a book value of $2.68, NetSpeak trades at less then 2 ¼ times the book value. Revenues have been on a steady climb throughout the fiscal year and expenses have been curtailed leading to an improving balance sheet. NetSpeak has announced new contract wins with companies such as China Unicom(CHU) , Genuity(GENU), RSL Communications(RSLC) and NetVoice that will keep the sales at a high level. Motorola’s introduction of a new Gatekeeper product built on NSPK’s technology should serve as a channel for increased presence among the larger communications companies. Netspeak’s small capital structure, similar to VocalTec’s, has less then 15 million shares outstanding which makes both candidates for potential takeovers.
While these companies may experience more downside in the short run, investors who are looking 6-18 months out in the technology enablers of the packetized voice revolution should see excellent returns as VoIP continues to alter how business defines communications. The bubble that inflated valuations sparked by the spate of new issues and the momentum driven bull market has clearly left many of the companies on the Internet Telephony Index, yet this has put investors into a good position. Irrational exuberance carried many of these companies through the ‘start-up period for the industry, but as displayed in the 3rd quarter reports, the area is beginning to mature. Future movement is going to come from revenues and earnings, which are on the rise. The scenario is set so that even if the bull market does not launch these companies to sky high prices, steady progress will boost shares over time and all of these companies should participate.
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