Sonus Sounds Like Risk: Under the Radar
BOSTON (TheStreet) -- Wireless companies desperately need to expand their capacity, as anyone who's used a cell phone can tell you.
Infrastructure is under enormous strain, compromising quality and reliability. Carriers such as
AT&T
(T) - Get Report
and
Verizon
(VZ) - Get Report
will have to make substantial investments in data infrastructure to simply keep pace with the wireless revolution. Rivaling landline telephone services will require massive expansion.
Because of those factors, an investment in a company like
Sonus Networks
(SONS)
seems like a no-brainer. Sonus supplies companies such as AT&T and Verizon with data-infrastructure products that help networks interface with newer technologies -- precisely what's needed to blend traditional services with data-hungry wireless networks supporting smart phones with Internet capability.
Unfortunately, this seems like another case of a great industry and a bad company.
TheStreet.com Ratings'
model gives Sonus a "sell" with a grade of D-plus. The ratings model takes issue with the stock's volatility as well as its performance. Many point to the company's gigantic cash hoard and lack of long-term debt as gold stars, but the sustained losses are troubling.
Analysts expect more losses this year and next, even as revenue grows 7% each of those years. A risk is that the world is quickly changing to data-based communications, and most of Sonus' business is connecting the voice world (phones) to the data world (voice over Internet Protocol, or VoIP). Thus, Sonus may be toiling in a market that one day will disappear unless it can tap into the growth of the data world. Lots of gear makers have failed in data communications.
Similar companies that
TheStreet.com Ratings'
model does like include
DG FastChannel
(DGIT)
,
Blue Coat Systems
(BCSI)
and
Acme Packet
(APKT)
. Those carry "buy" ratings with grades of B or better. While none focus on the same specialty as Sonus, they provide hardware and services for data transmission.
DG FastChannel focuses on ad delivery, and Acme Packet deals in interactive communications. Blue Coat provides business services and security over the Internet and wide-area networks. Those markets are under the same pressure as AT&T and Verizon. As communications become increasingly data intensive, capacity needs to race ahead to keep pace with demand. As a result, all those companies stand to gain as businesses resume equipment investments.
Over the past year, DG FastChannel, Acme Packet and Blue Coat have been far more successful than Sonus. While Sonus' stock gained 62%, DG FastChannel jumped 91%, Blue Coat almost tripled, and Acme more than tripled. The three companies also posted lower beta values than Sonus' 1.97. Beta is a measure of market risk, which is also known as non-diversifiable risk.
Industry trends are important factors in investment analysis, but so are earnings and prospects. Sonus has tremendous potential given its industry, but the fundamentals don't back up the case for investment.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.
