Smith Micro: Nice Rebound After Beat-Down

| About: Smith Micro (SMSI)

After getting hammered back down to reality, Smith Micro (NASDAQ:SMSI) appears to finally be a good value again.

Earnings surprises and news events have caused extreme swings in price in the last year, as we can see what happens when good news hits (passing the $16 price mark) and the aftermath of missed expectations, downgrades, and uncertainty (our current price point at just over $5).

I believe that expectations were way too high a few months ago; investors were looking for broad acceptance of mobile hotspot technology by the end of this year, not only from consumers but also from enterprises (which are always slow to adopt). Only the "techiest" of my techie friends utilize this technology, and it certainly needs to reach the next tier of adoption before I would expect any widespread integration on an enterprise level. This reality check has created an excellent buying opportunity for a company that, I believe, will see significant growth in 2012 as its technology is propagated at a more reasonable rate.

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In this chart, valuation is based on a DCF model, with an 8.5% long-term margin and 16% growth rate. The buy/sell bands are a function of the price volatility, where significant deviation from the valuation is seen as a buy/sell signal.
Growth prospects still look good. The company has solid footing in a good industry (mobile technology), respectable sponsorship from Verizon (NYSE:VZ), and sells a great product -- it's just in its early adoption stage. I believe margins will return to historical levels by next year as the beat-down ceases.
The book value/share (5.94) is higher than its current trading price, which seems to explain why this stock's downward momentum has eased in recent days. 40% of its assets are "cost in excess" of which, at the current price level, almost half are considered unbillable (assuming investors aren't counting cash as worthless). SMSI boasts no debt and a high institutional holding (70.6%) to boot.
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Glancing at the technicals, we see nearly linear dwindling volume on this downward price movement, which is a strong indicator of an upcoming trend reversal. Trend exhaustion works similarly to an elastic band being stretched, where there is little room for continued pulling, and a strong inclination to return to its true valuation. I wouldn't be surprised to see a 10% jump on the next piece of good news, and continued price increase as the sting wears off and normalcy returns.
This is a prime example of how to buy on bad news and sell on good news. With a positive outlook from Wall Street analysts (one more strong buy recommendation in the last month, other recommendations unchanged), and the support of crowd wisdom by Motley Fool CAPS's 4-star rating, this stock is on firm ground for a rebound.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.