NEON - thinking same. Article below tempers my optimism. Any thoughts?
When Stocks Get Creamed: NEON
On Tuesday, after the close, New Era of Networks (NEON) warned that their second quarter earnings would be substantially below estimates, with a loss somewhere between $0.12 and $0.22 per share. But the real killer was the statement that revenues were likely to be in the $25 million to $29 million range, a sequential decline from last quarter's revenues of $29.6 million.
After market trading showed NEON down nearly 23 points, in the $21 range, or more than 50%. Although no one can predict where NEON will eventually close today, a substantial loss for the day, compared to yesterday's close, is likely.
This comes after last quarter's disappointing results, which also caused NEON to drop 50% from a high of around $78 to $35 over the course of a month.
What causes a stock to drop 50% overnight? And 75% over three months? After all, NEON is still a much bigger company than it was a year ago.
Why NEON Dropped So Much
Prior to the Q1 report in 1999, New Era of Networks looked terrific. They had a good story, providing middleware for linking together disparate computer networks in an IT department. Their product acts as a platform for interchanging data between mainframes, minicomputers, networked PCs and the Web. It greatly simplifies a corporation's task of linking together all of it's IT systems. And as enterprises move to the web, linking together all of the IT systems becomes important.
Before the Q1 report, NEON stock rose steadily as both revenue and earnings increased each and every quarter. Taking out extraordinary charges for acquisitions, NEON's earnings and revenue looked great. Here is a table of revenue and earnings, excluding extraordinary charges. (Revenue shown in millions, earnings in per share, diluted.)
Q4 97 Q1 98 Q2 98 Q3 98 Q4 98 Q1 99
Revenue 8,272 9,582 11,460 17,463 27,309 29,611
Earnings 0.028 0.039 0.067 0.082 0.157 0.107
But then, in Q1, earnings growth dropped. While revenue increased to $29.6 million, continuing the upward trend, earnings dropped to $0.11 from $0.16 per share the quarter before. With the drop in momentum in earnings, the stock entered a gradual, but continual decline, falling from $78 to a low of $35 at the beginning of May.
But now, with a warning that revenues have also fallen, NEON has lost the second leg propping up the stock price. The earnings loss is less important, because with NEON's high gross margins, if they had been able to generate revenues above $30 million, they likely would have had recorded a profit.
After losing both driving factors behind the stock valuation, it isn't surprising that the stock falls 50%.
For now, at least, how can anyone claim that NEON is a growth stock?
NEON commanded a high Price/Sales ratio when it could rightfully be considered a growth stock. But now that it has hit a bump, the lofty price valuations are gone.
Business Analysis
:Long term business prospects are probably still fairly good at New Era for Networks. It just isn't on a growth curve. In fact, over the next three years, as more and more legacy enterprise systems come to the internet, the market for middleware is likely to grow substantially.
But possibly not until the Y2K problem has come and gone.
At the time of this writing, we have only the press release to analyze, but it is likely that a Y2K slowdown in corporate IT spending has a lot to do with NEON's slowdown in growth. Many corporate IT departments will think twice about starting new projects involving integration of legacy systems with the Y2K "big test" right around the corner.
If the Y2K problem is behind NEON's revenue slowdown, it means next quarter could be even worse. But it also means the year 2000 could be a great growth year.
But the stock market doesn't look that far ahead. If NEON isn't going to grow over the next six months, it doesn't get growth stock valuations now. It is as simple as that.
And valuations for non-growth software companies are more in the range of 3.0 times sales, not the 13.0 times sales that NEON stock had on Tuesday.
The Driving Factors Disappeared
NEON sported a high valuation when the stock price was at $75, with a price sales ratio of almost 34. This incredibly high valuation was acceptable, because both revenue and earnings were rising at good rates.
NEON lost the first 50% in market capitalization last April, when it lost the earnings growth curve.
It is losing 50% of market capitalization now because it has now lost the other driver behind it's stock price" rising revenues.
Until NEON shows a reversal of the revenue and earnings trends, it is not likely to recover the growth stock valuations it used to have, even if the rest of the market booms.
|
