If you like TERN with 5+ billion market cap, you'll love CMTO with 1.5 Billion market cap.
Feb 25, 2000
Com21: Undiscovered Broadband Play
Senior Analyst: Garrett Bekker (2/25/00)
Back in June of 1999, cable modem providers Com21 (NASDAQ:CMTO - news) and Terayon (NASDAQ:TERN - news) were so similar that choosing between the two was nearly impossible.
As it turned out, Terayon became a stock market darling in recent months, rising nearly five-fold from around $50 per share to over $250.
Com21, meanwhile, hasn't had nearly as much success. The company languished during the summer months, largely because its cable-modem technology failed to pass key certification tests. The net result was that the company's shares lost nearly two-thirds of their value, falling from a high in the mid-$30s back in the spring of 1999 to a low of $13.25 on October 29.
However, the stock has done well recently, rising 145% to $48.38 since closing at $19.75 on January 7. Yet, we think Com21's shares could get even hotter.
Com21 is a provider of cable modems, head-ends and integrated network management software that allow cable operators and service providers to deliver high-speed, cost-effective Internet and telephony applications over cable. While cable modems reside on a home user's PC, head-ends reside at the other end of the cable connection at the cable provider's facilities. In combination, the two products allow for the fast, reliable high-speed Internet and cable transmission that is becoming increasingly popular.
Com21 customers include Charter Communications (NASDAQ:CHTR - news) , Cox Communications (NYSE:COX - news) , Prime Cable, Philips (NYSE:PHG - news) , Siemens and AT&T's (NYSE:T - news) Tele-Communications, Inc.
Com21's Community Access system allows cable operators to offer up to 16 different transmission rates, which allow broadband service providers to offer residential and business customers different levels of service at various price points. Com21's system can be upgraded and scaled as subscribers grow, and is also designed to support cable telephony.
Com21 also announced last summer that it would utilize its broadband-over-cable technology to offer wireless telecommunications services. The company has already completed limited trials in which two-way, high-speed data access was conducted over a 20-mile radius.
Growth of high-speed Internet access and Internet-based telephony is perhaps reason enough to like the shares of any company competing in this space. High-speed or broadband access is one of the most exciting areas on the Internet, since it will permit the transmission of streaming audio and video and usher in true interactivity.
Today the majority of Internet surfers connect via telephone modems at speeds no more than 56,000 bits per second. By 2002, however, Forrester Research predicts the number of U.S. homes with high speed Internet access will increase from 500,000 in 1998 to 16 million, or 26% of total U.S Internet users.
Anyone who has witnessed Terayon's recent performance is well aware of this potential. However, our main reason for recommending Com21 is that we think that there is an enormous valuation disparity between these two companies that isn't justified, given how close we think they are.
Analysts on The Street are calling for Terayon to generate roughly $235.2 million in revenue during 2000. With 31.5 million shares outstanding and a current price of $259, this translates into a price-to-sales multiple of 34.7.
Com21, on the other hand, is expected to generate $163.5 million in revenue, and with a market-capitalization of $997.1 million, provides a price-to-sales ratio of just 6.1. This is a Huge discount to Terayon, and in our opinion this gap should narrow substantially. Com21's current price-to-sales multiple is slightly more than one-sixth that of Terayon.
Given the similarity of these two companies, we think further contraction in the valuation gap is quite reasonable. If Com21's multiple were to expand to one-third of Terayon's, or 11.6 times, this would translate into a price of $88, a premium of 83% to its current price of $48.38. If we want to get a bit more daring and assume that Com21's price-to-sales multiple could expand to one-half that of Terayon's, or 17.4 times sales, this would lead to a price of $132, a premium of 173% to its current price.
On what basis do we think Com21 is comparable to Terayon? For the fourth quarter ended December 31, Joel Achramowicz of Preferred Capital Markets estimates that Com21 generated roughly $24.8 million in revenue from cable modems, versus $27.6 million for Terayon. This is consistent with market projections from the Dell'Oro Group, which estimated that Com21 had 12.5% of the cable-modem market in the December 1999 quarter, while Terayon had 12.9%.
In head-end systems, Terayon had nearly twice the market share of Com21 (8.9% versus 4.5%). However, Com21 generated $4.7 million in head-end revenue versus $5.6 million for Terayon, as higher unit prices for Com21 largely offset lower unit volume.
Another reason to like Com21 is that the company was ranked No. 1 in European cable modems in 1998 by market research firm Ryan Hankin Kent, and named the third largest supplier of cable modem technology worldwide, based on independent studies by GartnerGroup/Dataquest, The Dell'Oro Group, and Cahners In-Stat Research Group.
While Internet usage by Western European households still trails the U.S., the potential for growth is enormous. The number of European households and businesses connected to the Internet doubled in 1998, rising from 5% to 10%, and is expected to reach 17% by the end of 1999.
Granted, we should point out that Terayon has made a number of acquisitions in recent months that were intended to move Terayon beyond just being a pure-play cable modem provider and move into other areas such as xDSL transmission, broadband video switching and computer telephony. This has certainly been a catalyst behind the meteoric rise of its share price.
Bottom Line:
While we might accept the argument that Terayon deserves a premium multiple based on these acquisitions, we don't see any clear reason why it should be worth nearly six times as much as Com21. Accordingly, we think more catching up is in order.
fnews.yahoo.com
Feb 25, 2000
FOOL PLATE SPECIAL
An Investment Opinion
Com21 Connecting
By Dave Marino-Nachison
February 25, 2000
In the category of "Good things that go to those who wait" should be inserted the story of cable modem and other high-speed Internet access equipment supplier Com21 Inc. (Nasdaq:CMTO - news) , shares of which have provided dynamic returns for investors who were willing to ride out the company's late-199 9 lows.
The shares rose more than 25% this morning, at one point setting an all-time high of more than $64, as the company unveiled a new product developed in connection with Tdsoft that lets its customers send voice and data at high speeds over cable lines. Tdsoft, which along with Com21 debuted the product at the CeBIT trade show in Germany, is trying to establish a position as a leader in sending voice over next-generation mediums such as DSL, cable, fiber, and wireless spectrums used in local telephone transmissions.
The catalyst for Com21's run upward, though, happened in early December when its modems finally received CableLabs certification, generally considered the industry's stamp of approval for use with data over cable system interface specification (DOCSIS) networks.
"We are obviously pleased to be recognized as a CableLabs certified vendor," Com21 President and CEO Peter Fenner said then. That was an understatement to say the least, the company having failed CableLabs' tests twice already -- and paying for it, most recently in early September, with market value.
Since then, order flow -- particularly overseas, where Com21's business is strong and CableLabs' certification isn't as important -- has been strong. A market that's been steadily warming to the prospects for broadband access of all types has also helped, to be sure, though it should be noted that Com21 does, as a result, compete in some markets with the likes of high-flying Terayon (Nasdaq:TERN - news) , 3Com (Nasdaq:COMS - news) , Motorola (NYSE:MOT - news) , and other major players.
But the company has nevertheless been able to carve out a solid market position, recent research reports estimating its shares in the customer premise equipment (CPE) market -- which covers goods that are located, surprisingly enough, on the customer's premises, like modems and set-top boxes, as opposed to the provider's -- at about 13%. Com21 operates in other sectors as well, comparing favorably with Terayon in several sectors.
And now some observers are wondering why Terayon trades at such a premium to Com21 given several different parameters; based on 1999 revenues, for instance, Terayon trades at about 60 times while Com21 is closer to 14. Is that disparity enough to warrant further upside for Com21's already hot shares? Not necessarily, but it certainly does appear like a good reason for further research.
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