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The following in an excerpt from an article by Eric Dubin, the Techstalker of MSN Strategy Lab that offers a possible explanation:
Group think: Musing on Dialogic 'investors'
If you think the so-called experts on Wall Street always understand what is going on with technology stocks, you may be pleasantly surprised to learn that the fast-moving tech world regularly humbles portfolio managers and analysts alike. These hard-working and well-meaning ladies and gentlemen often succumb to what social scientists call "group think."
"Group think" is much like the herd instinct. When times are good, the bulls rampage and the herd drives stocks higher. When fear strikes, the herd very easily can stampede for the exits. After a stampede for the exits, small-cap stocks are usually the last the herd is willing to buy. This is where our Dialogic (DLGC) story gets interesting, and where "group think" has quite a bit to do with the present valuation of the stock.
Group think extends a level deeper than generic herd instinct; it develops when the very institutions within a system create a culture that rewards conformity. For the moment, consider the fact that many money managers find their pay indirectly linked to how well they perform on a quarterly basis. Given this, it's not likely they will go against the grain -- to wear the hat of a contrarian. In our historic bull market, the far "safer" strategy has been to buy positions with favorable price momentum.
To some extent, the same pressures manifest for "sell-side" analysts. How would you feel if you had to listen to your firm's clients pepper you with questions (at best) after a stock you identified as a "buy" at $25 fell under $20? Even if you knew fundamentals would eventually improve and there was a solid and conservative case that the stock would move to $35 in less than 12 months, you might be hesitant to continue to call the stock a "buy" when the short-term floor collapsed. It's not an accident that analysts often rush to downgrade stocks after a catalyst has struck and a stock has already crashed!
In Dialogic's case, I believe group think is operating. It's very clear that voice and fax transmissions over packet-based networks like the Internet will rise in importance. Next year, this market will begin to build momentum. This will greatly benefit Dialogic, but Wall Street is under the mistaken impression that, given recent acquisitions, Cisco Systems (CSCO) is going to eat Dialogic's lunch.
Although Cisco's presence in this market is new, it's important to realize that in many cases, the hardware Dialogic sells may, in fact, benefit from the standardization process Cisco's presence will further. Take, for example, the recent announcement that Cisco and VocalTech Communications (VOCLF) will work together on standardizing gateways for Internet telephony. Since the Nov. 11 announcement, VocalTech has rocketed more than 50% higher while Dialogic has fallen.
Who do you think makes the boards that go into VocalTech's systems? Dialogic! The information is in plain view on VocalTech's Web page, but "group think" has portfolio managers continuing to fear Dialogic's total lack of momentum and the "C" word -- Cisco.
Although it is not certain how VocalTech will work with Cisco over time, Dialogic likely will not be pushed totally out of the VocalTech/Cisco relationship because Cisco still has a use for the type of uplink boards Dialogic can provide. It's not an absolute positive for Dialogic, to be sure. Cisco has little incentive to push Dialogic's hardware. But standardization efforts almost always are good for technology industries and VocalTech's independent sales efforts will increase, benefiting Dialogic.
Dialogic's high-end hardware likely will see an acceleration of sales in the second half of 1999, as companies like Nortel (NT) and Alcatel (ALA) integrate Dialogic's DM3 platform. Money managers are most concerned about Dialogic's high-end sales. But when revenue momentum returns -- and it will -- investors will return, sending the stock much higher.
I expect Dialogic shares to sell at $35 or higher at some point in 1999. I think the odds of this happening are better than 85%. In my book, a $15 profit on a $20 stock is a "buy," even if it proves to be dead money for six months.
Ultimately, Dialogic may be bought out. Its assets (technology, loyal engineers, market leading customer relationships, etc.) are undervalued at the current quote and numerous telecommunications equipment companies are seeking to beef up their packet-network based telephony product portfolios. I would not be surprised if Dialogic is bought by Alcatel, Nortel or Lucent in 1999.
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