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Summary

  • HIVE operates in the interesting mobile networking business.
  • Yet topline growth is slowing down rapidly.
  • This combined with losses and stiff competition makes me cautious.

[Editor's Note: Please note that the original article has been updated to reflect the latest financial statements released by the company.]

Aerohive Networks (NYSE:HIVE) became a publicly traded company at the end of March. The cloud-managed mobile networking platform saw an initial jump in its share price following this offering, after which shares have stagnated in recent weeks.

While the company has reported rapid growth in its revenues, the pace of this growth has slowed down dramatically in recent times. This is a big stumble block for me which makes an investment in Aerohive not very interesting at this point in time.

The Public Offering

Aerohive Networks offers a cloud-managed mobile networking platform which allows businesses to deploy a mobile-centric network edge. In essence it is benefiting from the increased complexity of business networks as employees are accessing their corporate network from more and more diverse mobile devices. The point at which devices access the network is called the "network edge".

Aerohive sold 7.5 million shares for $10 apiece, thereby raising $75 million in gross proceeds. The offering took place right at the middle of the preliminary $9-$11 offer range.

Some 17% of the total shares outstanding were offered in the public offering. At Thursday's closing price of $10.50 per share, the firm is valued at $458 million.

The major banks that brought the company public were Goldman Sachs (NYSE:GS), Bank of America/Merrill Lynch (NYSE:BAC), William Blair, JMP Securities (NYSE:JMP) and Piper Jaffray (NYSE:PJC).

Valuation

Aerohive's network edge solutions allow companies to give their employees a cost-effective, scalable and reliable entry point of their networks. The platform is combined with hardware access points, provided by the company as well, which are managed through the cloud-based platform.

Some 11,500 end-customers already use Aerohive's solutions which are marketed through a network of resellers and distributors. Despite the great number of end-customers, Aerohive's business is geared towards North America. The company generates roughly two-thirds of its annual revenues in this geographic region.

For the year of 2012, Aerohive generated revenues of $71.2 million which is up an astonishing 109.7% compared to a year earlier. This came at an expense as net losses widened from $14.8 million in 2012 to $24.8 million during that year.

Growth continued in 2013, although the pace of this growth slowed down notably. Revenues for the year rose by 50.4% to $107.1 million. Net losses were on the rise again, increasing towards $33.2 million.

Aerohive operates with nearly $34 million in cash and equivalents before the offering took place. At the same time it reported roughly $10 million in debt on its balance sheet. Factoring in the $75 million in gross proceeds from the offering and Aerohive will operate with a net cash position which approaches a $100 million.

This values operating assets at a little over $350 million, which values operating assets at roughly 3.3 times annual revenues.

Investment Thesis

The public offering of Aerohive Networks appears to have been priced fairly. The offering price took place right at the midpoint of the preliminary offering range, after which shares have settled around those levels. This is despite a temporary spike upwards in the first few days following the public offering.

The biggest problem for Aerohive are not the losses or stiff competition, but arguably the slowing revenue growth.

As a matter of fact, revenue growth slowed down to 45.5% in the final quarter of 2013 as revenues rose to $30.3 million for the final quarter. While growth is much more spectacular compared to some of its more established competitors like Hewlett-Packard (NYSE:HPQ), Juniper Networks (NYSE:JNPR) and Cisco Systems (NASDAQ:CSCO), it is still a remarkable slowdown.

Of course, this slowdown has been priced in to some extent, with the business being priced at roughly 3.3 times annual revenues. While this is a relatively attractive multiple for a network provider which is showing rapid growth, the slower growth trend on itself is a major course of concern.

Combined with the superior financial resources of many of its competitors and the continued and growing losses, there are plenty of reasons for me to stay cautious.

I am not interested to pick up shares at this point in time.

Source: Aerohive Networks - Growth Slowdown Is A Big Worry For This Cloud Networking Provider