Editor's note: This Stocks Under $10 alert was originally sent to subscribers July 7 at 9:34 a.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.
We are adding Openwave ( OPWV) to our watch list. We believe that shares, which closed Thursday at $7.77, are discounting a number of negative data points and that upside will be driven by strong demand for mobile 3G wireless services and music downloads to mobile phones. However, management has lost some credibility because of a large earnings warning Thursday, and we will wait for weakness closer to the $6 level before initiating a position. Openwave, a potential Inflection Point play -- a stock with a broken business model that's on the mend but has yet to be recognized by the market -- in our proprietary rating system, lost 32% in trading Thursday after the company preannounced a large fiscal fourth-quarter earnings and revenue shortfall. We've had Openwave on our radar screen for the past two weeks and were expecting the company to miss the Street's expectations this quarter; we believed that would create a compelling entry point for investors with long-term time horizons. With our thesis playing out as expected, we believe that shares are approaching an attractive level for investors and that valuation will support the stock if it drops closer to the $6 level. The company will report earnings Sept. 12. Openwave generates revenue through the sale of software that enables text messaging and email over wireless networks to cell phones. In addition, the company sells software that is installed on cell phones to enable Web browsing. Thanks to its recent acquisition of Musiwave, Openwave also distributes media content, such as music and video, to cell phones.
- First, Openwave hasn't announced any new contracts with wireless carriers or handset manufacturers this year, despite previously stated plans on its most recent conference call to announce three new contracts.
- Second, during the past 12 months, the company has grown dependent on large deals at the end of most quarters to meet consensus forecasts, and that raises the potential for earnings misses. Openwave's days sales outstanding (DSO) -- the average number of days that customers take to pay their bill -- has been rising over the past five quarters despite comments from management that the DSO number should be declining. This disconnect raises concerns about the structure of the company's contracts and possible concessions that may have been required in order to close deals at the end of a quarter.
- Last, Openwave is under investigation by the Securities and Exchange Commission for options backdating.