Last quarter, it was pointed out on this thread that MWAR had become a story stock (although not recognized as such by analysts), because the company became dependent upon royalty income which was expected to be significant starting in about one year. The risk in owning the stock was that there could well be revenue shortfalls before royalties kick in, tanking the stock. Well, one quarter later and that is indeed what has happened. MWAR pre-announced that revenues will be a paltry $5.9 million versus H&Q's estimate of $7.8 million, for a loss of 3 or 4 cents per share.
Unfortunately MWAR started IPO life with expensive shares justified on immediate number production: roughly twenty-some cents the first year; forty-some cents the next, with high earnings growth. The aggressive pattern needed to support these numbers was broken last quarter, but the analysts' held stubbornly close to their original estimates, only to be dashed completely today by the cold reality of a revenues shortfall.
There is room in this world for story stocks, but this is not the way to become one. The market is not sympathetic with appeals to future revenues to justify stock price only after you failed to achieve stated revenue estimates. If you are a story stock, you have to start out as a story stock, and then you graduate to a regular stock where your price is determined by near-term earnings and realistic earnings growth. You never start out with earnings and growth expectations, and then regress to a story. Companies that do that must first go through a "turn-around" phase in which they bottom out and then start the long, hard trek back to acceptance, facing "show-me" analysts all the way. "Show-me" analysts bend a deaf ear toward anyone telling stories, all at once they are all from Missouri. In the name of conservatism, they remove all the story from estimates, and put the stock on hold.
In short, MWAR should be sold or put on hold. It then needs to be continually tracked for signs of life, at which point (should it come) it may be greatly rewarding to the patient investor.
In regard to WIND, the key issue the market must decide once more is whether MWAR's travails are a sector slow-down problem, or is it localized to companies that have not yet secured a broad enough business base to grow unimpeded. As stated before, MWAR took, or was forced to take, the risky path of market niches that are not paying off sufficiently today. Digital TV is an ambiguous product, as is Java-based Internet Appliances. (Both of these product areas are exciting and promise to be gigantic at some point - we just don't know exactly when.) Wireless on the client side is guaranteed to come on like a steam-roller in 1997, but it is awash in competition, including MSFT, GWRX, WIND, INTS, etc., etc.; while on the infrastructure side it is dominated by WIND and ordinary server computers.
MWAR's problems do not reflect negatively on WIND. If anything, they support the thesis that WIND has limited MWAR's potential, contributing to the company's problems. However, be prepared for another few days of sympathy by the market, in which the whole sector gets punished.
We have been here before.
Allen |
