Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.
Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.
Back on May 20, 2016, I wrote an article about RADCOM (RDCM), which had just done a public offering. As is usually the case with offerings, the stock was down sharply on the news. However, I used this particular occasion to teach investors how to make money from these situations.
You see, most investors don’t know it, but there are two types of offerings, bullish ones and bearish ones. Of course, most offerings immediately cause the stock to drop… but that’s just a function of supply and demand. All things being equal, more supply causes a decrease in price.
When it comes to stocks though, temporary supply/demand imbalances tell us nothing about the value of the underlying company.
A simple rule of thumb can give you a good indication as to whether the offering is bullish or bearish:
- If the money is NEEDED, the offering is generally bearish
- If the money is NOT NEEDED, the offering is generally bullish
The reasoning is simple.
If the company needs money, they’ve probably been burning it and aren’t too close to profitability (otherwise a bridge loan might suffice without causing dilution).
Conversely, if the money isn’t needed, the company has little reason to dilute itself unless 1) business is going great and they want to hit the accelerator or 2) they have something up their sleeves, like an accretive acquisition that’s they’re ready to close.
In the case of RADCOM in 2016, business was going great and they wanted to hit the accelerator. Knowing this, I backed up the truck and bought as much as I could stomach that day. Sure enough, the business quickly ramped (with the help of the money they raised) and the stock doubled in just a few months.
Money-wise, it made my year.
I recently ramped up my ownership in two companies after they completed a round of “bullish” financing: GAIA (GAIA) and Smith Micro (SMSI).
Those who have been following GAIA already know that they just announced spectacular Q1 results, just weeks after completing their round of funding. On the call, they talked about how profitable their marketing efforts have been. Because of this, they planned on using their newly-raised money to make more money for shareholders.
I doubled my position on the morning before the call and netted about 13% in 48 hours.
Similarly, I raised my holdings in SMSI after its recent offering. This evening, the company confirmed my expectations by hosting a bullish earnings call. On the call they discussed their business momentum and plans to accelerate their product roadmap and M&A activity.
Needless to say, I expect my investments in SMSI and GAIA to continue paying dividends in the months ahead. For more on that, see my recent write-ups on GAIA/SMSI and the upcoming SMSI earnings recap (coming tomorrow AM).
In the meantime, here’s an abbreviated version of the RDCM original article.
RADCOM & The Power Of Buying Low
RADCOM is a leader in providing Network Functions Virtualization (NFV) service assurance. The company has been well-covered on Seeking Alpha by Mike Arnold. I highly recommend his work for greater detail on what the company does and why demand is starting to explode. In this article, I will focus on providing an update regarding current events at RDCM.
For starters, the stock hit the bottom of its short-term (technical) channel this week (shown in gray). This is not be confused with its broader, longer-term, and fundamentally-based Risk/Reward channel, which is in white.
On May 10, the company announced blowout results and hosted a bullish earnings call. I highly recommend it for anyone invested or considering an investment in RDCM. For those seeking the highlights, here are a couple of the most notable quotes from the call (the transcript was shaky, so I took the liberty of making it more readable):
Yaron Ravkaie (Chief Executive Officer): “…we’re widening the gap with our competitors… we’ll be the aggressive ones that take market share… and we’ve already taken market share… just from the beginning of the year, we are engaged with five new logos that we have we didn’t do business with — and I would even say that I am not sure we would have attracted — in the past. (With the first tier-1 win), the door now gets open to us very fast and everybody wants to learn… we’re positioned as like a leader… everybody is interested in service assurance because when you roll out a complicated NFV network… they all understand that they can’t (do it) without putting service assurance, which can be their eyes in their network. So we are seeing all of that come together… usually what happens is now several will follow and we’re in discussions with the right ones.”
This is consistent with what Pipeline Data has gathered from our industry contacts. We have ascertained that AT&T is the tier-1 customer in question… and when AT&T makes a move, their competitors take note. Investors can bet that every notable NFV decision-maker in the industry now knows that RDCM won AT&T’s business after an extensive evaluation in its labs.
In fact, word is spreading that RDCM’s product (MaveriQ) scored a perfect 100/100 in its lab trials, while the nearest competitor could only manage a 70/100. In other words, RDCM’s technology lead is wide, making them the de facto leader for NFV Service Assurance. Investors should note that we estimate the AT&T relationship at $50 million (on top of the initial $18 million it has already collected).
The implications — as RDCM signs new Communications Service Providers (CSPs) — are significant. Its market cap is just over $100 million. Meanwhile, revenue estimates only call for $29 million in revenue this year and $37 million in 2017.
Yaron Ravkaie (Chief Executive Officer): “We’re starting to get a line-of-sight… which will be step function for the numbers (we forecasted on this call)… we are hunting elephants. Each elephant will be a big step-up function for us.”
Here, the CEO is saying that RDCM’s guidance for 2016 does not incorporate the potential for any additional large deals this year. However, he goes on to say that large deals are what they are going after. In other words, if they haveany success in landing one or more of the five customers mentioned in the first quote, they will crush their guidance.
This continues to remind me of RDWR, which was a go-nowhere company until 2010, when its software-based approach to application delivery took off. From 2009 through 2012, revenues nearly doubled… and EPS went from a loss of 31-cents to a profit of $1.45 per share. The stock responded by going from $2 to $25.
By coincidence, RDCM also made a recent (2013) low of $2 and has the makings of a stock on its way to $25, but the fundamental market shift from hardware-based solutions to software based solutions is the real correlation to draw here.
The key is showing leadership in your niche. In this case, we hear that industry experts have been mentioning RADCOM’s offering as an example of why some CSPs succeed with NFV while others (like BT) fail.
In addition to the information provided above, we are hearing that AT&T is interested in additional products (likely in the area of cyber security) from RDCM, as well as a co-marketing agreement.
Of course, developing products, and ramping one’s sales and marketing efforts requires capital. For this reason, RDCM announced that it intends to offer $20 million of its ordinary shares in an underwritten public offering. As part of this offering, RADCOM’S largest shareholder, Zohar Zisapel, agreed to purchase up to $5.6 million of the stock.
As is typical in these situations, the news sent RDCM plummeting in the days that followed.
What most retail investors don’t realize is that a large percentage of secondaries are actually bullish for the company involved. There’s a simple way to separate the wheat from the chaff, as I discussed on Seeking Alpha after a GLUU secondary. Those who heeded the lesson were treated to a 99% ride in just three-weeks (from $3.69 to $7.34).
For bullish secondaries, the share-price decline that occurs upon the deal’s announcement is simply due a short-term imbalance in the supply and demand of shares. I believe this is the case with RDCM. According to my sources, institutional investors requested about $40 million worth of RDCM’s $20 million offering. The underwriter likely allocated $15 million of the deal to RDCM’s largest shareholders, leaving everyone else with a small percentage of the shares they wanted.
Those investors will have to buy in the open market… as I did this morning.
I don’t see a three-week 99% ride ahead for RDCM, but I do believe the shares should quickly rebound to its post-earnings (May 10) price of $14.20. If it can reach 13.50 quickly, the stock might qualify for inclusion in the Russell 2000 index. This would raise the company’s respectability and liquidity profile, attracting a new wave of institutional interest.
Regardless of how that plays out, RADCOM is clearly a prime candidate to benefit from the emerging NFV/SDN movement. It has an expanding relationship with AT&T, a growing pipeline of CSP business, a war chest of cash, and earnings power which we currently estimate at $3 per share. At current levels, the upside is great if the company executes.
However, even if the RADCOM struggles to figure out how to be a small fish in the big pond, there are plenty of players (i.e. Cisco) that can benefit from acquiring their uniquely-positioned business. With the nearest competitor scoring just 70/100, whoever controls RADCOM’s product set will be well-positioned to win entire infrastructure deals, which dwarf the service assurance contracts that RDCM is currently securing.
Based on all of the above, I believe that today represents an ideal entry point for shares of RDCM.
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Disclosures / Disclaimers: I am long RDCM. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.