Dronamraju Ravi Prakash

Jeff Friedl asked me to take a look at this stock and analyze it. So i thought this would be a good way to walk through the usual analysis steps and document them

Numbers
Investing is really about numbers. You have x dollars and you want to get x+y dollars back via this investment. First thing i start out - like anyone else - is look at the numbers. As of September 20th, the market cap for Avanex is about 350M$. They have decent ttm revenues (106M) and some net cash (~ 70M). They have a revenue growth of 399% in the last year and an EBITDA of ~117M. This kind of indicates that Avanex is a newish company with a up and coming product. Looks like they are just now transitioning from r&d of the product into a sales ramp-up.

Looking at the stock chart though, this looks like a chart of turn around play than of a growth play. The hit a peak of $7.57 in Jan 04 and slipped all the way down $2.50 on sept 20th. Let's look at the earnings reports and news for further research.

Recent News

Well well, what do we have here. Avanex added new CEO on August 9th. That's not bad news.
The earnings were out a week before on August 2. The earnings report basically had all these growth numbers. Interesting things i caught were

1. some growth achieved through acquisitions. Avanex (AVNX) acquired parts of alcatel, vitesse, corning.
2. limited visibility from customers. "While visibility in the optical industry has not improved meaningfully, we continue to see tremendous potential for our products and technologies as carriers migrate to next generation networks."
3. outlook for the next quarter of a 10% sequential revenue improvement.

Again things look mixed here. They say that there is going to be solid sequential revenue growth. However, i am not encouraged by a company that did 3 acquisitions last year, while cash flow/other metrics are largely negative.

Auditor Resigns...

August 23rd, I find out that the E&Y resigned as auditor for AVNX. While there could be a lot of reasons why this could happen, i am a bit nervous about it. Granted it seems like E&Y is not going to disagree with AVNX's financial statements, it still makes me nervous

Next Steps

This looks like it's an interesting pick. If everything adds up this could be a new strong growth stock, however, there's quite a few warning signs. Here's what i am going to investigate as next steps

1. Avanex's product line. what are they, how do they fit into the whole networking universe
2. Avanex's customer base. Who are they, what are their prospects etc
3. Avanex's competitors.