Don't Pass Judgment On Acme Packet

| About: Acme Packet, (APKT)

Mike Tyson once said, "Everybody has a plan until they get punched in the mouth." That's what happened to investors with a go for broke strategy last Spring as they bought Acme Packet (NASDAQ:APKT) with devil-may-care abandon. I covered the stock in early April when it appeared to be a winning lottery ticket, giving share owners more than a 20x gain since the market bottomed two years earlier. In fact, it was almost a 30 bagger when it reached its 52 week high of $83 just three weeks after I posted the article.

Sometimes a stock can get ahead of itself, and, Acme Packet's recent trading history is Exhibit A of why investors should not chase momentum. It closed today at around $33, $50 below its price just eight months prior. It hijacked your money if you bought the equity when it graced the upper echelon of the Investor's Business Daily top 50 stocks. One of the reasons that it was king of the roost is that it's a trailblazing company. You can feel the tectonic plates shifting with the build-out of Internet 2.0, and Acme Packet does the trench work to make your end-user experience seem like magic. This company is no second-class citizen.

CEO Andy Ory is a forward-thinking revolutionary in the tech sector. Not only does he captain the ship, but he also co-founded the organization. My last article gave a lot of detail about what Acme Packet does, and I don't want to be redundant, so I'll just summarize. Acme Packet is by far the worldwide leader in Session Border Controllers (SBCs) which act as the traffic lights of the World Wide Web. According to the June 24th ValueLine analysis by Damon Churchwell: "The ongoing transition to next-generation communications networks will probably drive top and bottom line advances. Service providers are replacing their traditional circuit- switched networks with these technologies, thus requiring SBCs.".

Mr. Ory expounds on this in the July 21st, Q2 conference call: "We continue to see evidence of our expanding market share. According to a recent report issued by Infonetics Research, our share of the service provider SBC market expanded to 65% for the first quarter of 2011, more than eight times greater than any other supplier in the market...We estimate that our total addressable market is as simple as A plus B, where A is the opportunity for our solutions to replace legacy voice connection technologies as voice becomes VOIP. We estimate that more than $30 billion of legacy solutions have been deployed in service provider and enterprise networks globally to support voice applications.".

With such a steep decline in share price, you'd think the stock would have been invigorated by now considering its pole position in the race to build out the backbone of Internet 2.0. However, it hit a speed bump in the most recent October 20th, Q3 conference call. Sales and earnings were slightly less than expected due to the timing of becoming a supplier of Voice over LTE (Long Term Evolution) equipment for an undisclosed company.

Both the Standard & Poor's report, and, the analysis I read from Credit Suisse speculate that the company is AT&T (NYSE:T), but that was not confirmed in the conference call. That large contract is slated to be closed in Q4, but still, the financial masterminds continue to punish Acme Packet. Twenty-five percent of revenues are derived from Europe, and, all of the analysts' reports cautioned about macroeconomic conditions overseas, but according to the conference calls, this is not a big issue.

When we break out the consensus earnings estimates on Yahoo Finance, we get $1.14/share for 2011, and, $1.46/share for 2012. This gives us P/E Ratios of 28 currently, and, 22.5 going forward. These ratios are very reasonable when you take into consideration the CAGR (compound annual growth rate) for the next 5 years is 26%. That's a PEG Ratio of less than one for 2012.

I usually salivate like a Pavlov dog when I find a top-flight company with such compelling numbers, however, I am out of the market right now because of the uncertainty in Europe (the U.S., Middle East, and, China, too, for that matter). I have put all investments except for cash and shorts on the back burner for the time being. You may feel differently about the prospects of the market going forward, and, if you are bullish, then Acme Packet would be a nice addition to your portfolio. Buying this security at these levels is like Value Investing 101.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am short the market with inverse ETFs