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.

Yet another story of a high flyer promising a lot, but faltering on delivery. The latest story on redhat's earnings points out several potential weaknesses

1. Enterprise sales not strong
2. Enterprise pricing is weaker than anticipated
3. Increasing deferred revenue (why?)
4. Management appearing to withhold information

Even after a brutal 55% downfall in the last 4 months, the market cap of this stock is at 2.42B (stock price $13.2). Executives left the company, and it's taking a huge PR hit amongst the investment community for the decisions to keep some information private. The PE ratios are still hovering over 100 and price sales ratio is a hefty 20.

There's good news from the company as well. Profits grew a healthy 225% y/o/y and revenues are up 60% y/o/y. They have almost a Billion dollars in cash. 600M of that billion is offset by a convertible note (debt) convertible at 39.07. They look like they are on track to do about 180-200M in revenue this year and about 0.13c in earnings.

This stock is begining to look interesting at these price ranges. I wonder what would be a good price to get into? around 10?

SEAC - Seachange Intl
Purchase Price - $15.10
Current Price - $16.54 -- Get Quote

NTAP - Network Appliance
Purchase Price - $19.12
Current Price - $23.22 -- Get Quote

JNPR - Juniper Networks
Purchase Price - $23.50
Current Price - $25.89 -- Get Quote

Despite the general weakness in the market - nasdaq down ~150 points since end of june - tech infrastructure plays have held up reasonably. I am particularly impressed with NTAP (Network Appliance) which is upto $21.89 today.

JNPR (Juniper networks) is another stock that is showing a lot of strength in the last few weeks. Even though there's been a cloud hanging over this sector since the CSCO (cisco) report, the news/rumblings coming out the JNPR camp have been very positive. First there's this report from wachovia, raising revenue/profit estimates for Juniper. Now, i am also hearing rumors of really strong Q3 from couple of my sources in the stock broker community. It may not be wise normally to rely on "hot tips" from brokers, but these brokers that i heard the news from are very reliable and i know them for a while.

The ratios look very unfriendly for JNPR though. We are looking at a forward (2005) P/E of 4o. However the PEG ratio is 0.8 (40PE vs 50% EPS growth) and they have about a 1$/share in cash. On the whole this looks more like a bet and less like an investment.

What's making me feel comfortable about Juniper networks (JNPR) though, is my belief in this sector. This pretty much a 2 player game and the sector continues to grow. I believe the growth potential is solid for another few years, especially when you see how the infrastructure needs to upgraded all over the world (europe, india, china)
My position: HOLD for another 6 months and re-evaluate.

Netflix(NFLX) is generating a lot of buzz with it's latest story on relationship with tivo. The result of the buzz is evident with the stock being up 15.9% on very heavy volume. 6.5M shares traded by noon eastern vs a avg daily volume of 2.5m shares.

Even after this near 20% bounce, the high flying stock is less than half of it's peak value of ~40$/share. The question to ask now - is it time to buy NFLX again?

Let's look deeper. @16.65$/share the market cap of NFLX is ~870M$. Take out ~150M in cash holdings and their enterprise value is about 720M. Compare that with the trailing twelve month revenue - 375M, we are looking at a decent multiple. But, in all honesty, who cares about the past revenue ? :)
Even though we have to take the analyst estimates with a pinch of salt, the estimates for calendar year 2004 are at 520M and for 2005 @ 830M. So if this company maintains the current EV/rev ratio of just under 2, we are looking at a valuation range of 1.4-1.5B$. That puts the stock price at around 32-33.
Time to get back into this stock again?