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A recent IPO that seems worthy of some attention and discussion: Western Multiplex Plays the Little Engine That Could By Adam Lashinsky Silicon Valley Columnist Originally posted at 7:00 AM ET 9/1/00 on RealMoney.com Every now and again a technology company goes public with little fanfare, asks investors for a somewhat reasonable valuation, and achieves modest stock appreciation. Analysts with its underwriters initiate coverage a month later with favorable recommendations. And the company proceeds to grow even more quickly than analysts expect them to, generally causing the stock to go up more. As suggested here in a pre-IPO profile in June, this has been just the scenario shares of Western Multiplex (WMUX:Nasdaq - news) have followed since their Aug. 1 initial public offering at $12. A look at the company's first month as a public company paints a somewhat unusual picture of a tech investment for less caffeinated investors. To wit, not every tech company has to be turbo-charged to be a money maker. Shares of Western Multiplex, a Sunnyvale, Calif., company that makes equipment for wireless broadband systems, traded up modestly since its IPO, which raised $82 million for the company. Before Thursday, the shares had moved up to $16.50. When analysts with underwriters Lehman Brothers, Salomon Smith Barney and CIBC World Markets initiated coverage on cue this week, the stock soared, closing up 21% Thursday at $19.94. What's likeable about this company and its stock is its low-key nature. It's profitable, has gross margins of more than 50% and is more than doubling its revenue on a year-over-year basis. Second-quarter revenue was up only 9% from the first quarter, but that's not as bad as it looks. The wintertime, when it's rather unpleasant in North America to install Western Multiplex's equipment on rooftops, is traditionally a slower time. And yet, its valuation at the time of the IPO was about $620 million, a pittance relative to any number of higher-profile tech companies. Indeed, the analysts assigned by their investment banks to follow Western Multiplex are in universal agreement on why the company's shares should rise, and precisely how to measure the target. Each analyst -- Tim Luke at Lehman, Alex Cena at Solly and Dale Pfau at CIBC -- points out that Western Multiplex ought to be worth about 10 times its 2001 revenue, based on a similar valuation for the company's competitors in the broadband wireless industry. Their estimates of Western Multiplex's 2001 revenue vary, making their 12-month price targets vary from $25 to $27. Each firm initiated coverage with a buy recommendation. (An aside: Each analyst suggests his revenue projections -- which average $88.4 million in 2000 and $141.3 million in 2001 -- are "conservative" and should be exceeded by Western Multiplex. Doesn't that kind of beg the question of why the analysts don't simply raise their projections now? Of course, that's a silly question because raising estimates carries only downside risk for the analyst, who loses face if the company misses expectations and wins when he raises estimates, generating more trading in the stock. A crazy world, to be sure, but it's our world.) Of particular interest to illuminate why Western Multiplex is attractive is some number crunching by Lehman's Luke. He compiled lists of price-to-sales ratios at three groups of Western Multiplex's competitors: wireless broadband access (like Western Multiplex), wire-line broadband access (like Copper Mountain (CMTN:Nasdaq - news) and Redback Networks (RBAK:Nasdaq - news)), and next-generation networking companies (like Cisco (CSCO:Nasdaq - news) and Juniper (JNPR:Nasdaq - news)). The average price-sales ratio for the wireless-equipment providers, as noted, is 10.4, based on 2001 revenue. (The competitors are: Adaptive Broadband (ADAP:Nasdaq - news), Airspan (AIRN:Nasdaq - news), DMC Stratex (STXN:Nasdaq - news), Giganet (GGNT:Nasdaq - news), Netro (NTRO:Nasdaq - news), P-Com (PCOM:Nasdaq - news), Proxim (PROX:Nasdaq - news) and Vyyo (VYYO:Nasdaq - news)). For wire-line companies, the average ratio is 15.5. And for the major infrastructure companies it is 43.3, largely because Juniper trades for 123 times Luke's 2001 revenue estimate. The obvious takeaway is that wireless broadband potentially is the relative "value" play of the Internet infrastructure world. There's another reason Western Multiplex is easy for investment bankers to love, a reason that also suggests the company will get much bigger quickly. Western Multiplex is promising to be acquisitive. Chief Financial Officer Nancy Huber says the company has three target areas for acquisitions. One is to improve its international sales, given that two-thirds of its potential markets are abroad but less than one-third of revenue is coming from outside the U.S. The second area is to broaden the company's product line, particularly into equipment that uses different parts of the radio spectrum than Western Multiplex's current offerings use. The third is to buy out competitors simply as a way of getting bigger. Huber says the man heading the shopping expedition is the company's CEO, Jon Zakin. He's a good man for the job. Zakin is the former U.S. Robotics executive vice president who bought Palm Computing, giving Robotics acquirer 3Com (COMS:Nasdaq - news) about the only valuable piece of its business several years later. But don't look for Western Multiplex to be depleting its IPO cash horde for acquisitions. "We're probably not going to use cash," says Huber, noting that a major reason for going public was to create a currency for buying other companies. Western Multiplex is less exciting than your average Nasdaq-listed IPO. It's also likely to be a good deal more consistent. | ||||||||||||||
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