Last week DragonWave announced an equity offering to raise more than $20m, causing the shares to drop about 15% in a day.
Although this has come a bit earlier than I expected, The shares are at the same level they were in June and the company will now be better capitalized.
Major catalysts remain intact for the coming year, and the stock has big upside potential due to major increases around the world in 4G/LTE CapEx spending.
On July 25th DragonWave (NASDAQ:DRWI) announced that it had priced an equity offering of 13,850,000 units at C$1.80, which equates to about $1.65/share at current exchange rates. Each unit in the offering also includes one half of a warrant with a strike price of about $2.07 (a full warrant is equal to one common share). The offering closes at the end of this week, and should net the company more than $20m. The company also announced at the same time a shelf registration that could allow it to raise upwards of another $80m in the future if needed. Upon announcement of the offering last week, the share price dropped about 15% in one day and has now settled in the range of $1.60, which is close to where it was in the end of June. In the past month shares had risen sharply to as much as $2.37 on July 10th, a rise that started with my positive coverage on the stock June 26th and which was followed by an analyst upgrade and a lot of enthusiasm right up to the Q1 earnings report announcement.
Now in my detailed coverage of DragonWave I labeled near-term equity dilution as a medium risk. It was clear that the company was on thin ice in terms of its cash balance, and since it was not likely to be cash flow positive until later in 2014, this near term liquidity issue was one of the bigger risks for the company. This did happen a bit earlier than I had anticipated, but in hindsight it's not all that surprising that it made this move, especially after the Q1 conference call when management hinted in a round-a-bout way that they may use the share price rise to consider raising capital again. Ever since the call a few weeks ago, the shares had already been falling back down and were below $2 at the time of the offering announcement last week. Despite this short term roller coaster ride, I still think nothing has fundamentally changed in the story for the coming year, and in fact the company now finds itself with a share price right where it was before the big rise, but now it will have a lot more cash.
As the share price settles down this week, now could be a good time to accumulate more shares. Below a summary of a few key points I see to remain long the stock:
- Management stated in the Q1 conference call that their pipeline is even stronger for Q2 than at the equivalent period last quarter, and they expected sequential growth of 25-40%, which would bring revenues in the $35-$40m range. This is accelerating even quicker than I anticipated, and could indicate that my full year forecast of $140m was conservative.
- The contract from Reliance Jio and potentially new orders from Sprint (NYSE:S) could get a boost by the company's improved balance sheet. Undoubtedly these large companies do their due diligence and like suppliers with an improved financial position.
- Nokia (NYSE:NOK) had a good earnings report last week with sequential growth of 10% in its networks business. The company raised its outlook citing strong sales in LTE networks, and seemed to add further evidence that there should continue to be a strong CapEx cycle for the remainder of 2014.
Putting these thoughts together, I continue to hold long on DragonWave and will accumulate more at these prices. I see the shares moving back up at least 50-100% in the next year as sales pick up further from the Reliance Jio partnership and demand remains strong in other geographies.
Disclosure: The author is long DRWI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.