Comtech's Microsoft Deal: No Big Deal

Nov. 2.06 | About: Viewtran Group, (VIEW)

You can just picture daytraders hitting the buy button on Comtech Group (COGO) as soon as the headline crossed the wire: "Comtech Group, Inc. Announces New Partnership With Microsoft." Even the first few paragraphs sound remarkably promising, especially this sentence:

Specifically, utilizing Microsoft software applications, Comtech will increase its competitiveness in design solutions for digital media initiatives targeting the Portable Media Player, Digital and IPTV set top-box, GPS, Game Console and Smartphone markets.

That sure makes it sound like a broad licensing deal, one that could lead to all kinds of opportunities--set top boxes or iPod-like devices incorporating X-Box technologies, etc. But the actual licensing deal, not fully explained in Comtech's press release but contained in Microsoft's press release, was far less exciting.

Comtech didn't license any of the Microsoft (NASDAQ:MSFT) technologies developed in Redmond that investors have come to associate with that company. Instead, Comtech (along with another Chinese company I had never heard of, Hunan Talkweb Information System Co. Ltd.) entered into a nonexclusive license for three technologies (that I had also never heard of) developed by a reasearch center Microsoft formed in mainland China. The licensed technologies are: Mobile Picture, Mobile Bandwidth Optimization and Personalized Facial Sketch. To my knowledge, none of these technologies have ever been commercialized.

Comtech traders need to keep their eye on the ball. This Microsoft deal may eventually lead to something interesting, but for now it represents very little. More importantly, ZTE Corporation, a customer highlighted in Comtech's last earnings release, just announced a huge drop in profits on declining sales of its high-margin products.

I think Comtech is a solid little company, and should do well in the coming years. However, the overwhelming optimism baked into the current stock price will likely prove to be unsustainable. I shorted shares this morning, and expect a pullback below $16 within the next two weeks.

DISCLOSURE: I am short COGO. I have no position in MSFT, ZTE or Talkweb.

COGO 11/1/06: