AudioCodes was one of those companies, along with the likes of msystems [now part of SanDisk Corporation (SNDK)], and Alvarion Ltd. (ALVR) that I believed was destined for glory. I still feel that way, because of AudiCodes' leading position in a rapidly growing niche, and also because of its managerial and technological capabilities.
When I read company chairman, president and CEO Shabtai Adlersberg's updated guidance, I felt unable to express my views objectively. Something happened on Main Street which Adlersberg, one of the veterans of the VoIP industry, was unable to explain. That a market should behave contrary to the expectations of even its most experienced insiders is not uncommon in the business world. But those not from the industry who studied AudioCodes' announcement could, quite rightly, think that something was wrong and stay away from the stock, especially given the rush by analysts to downgrade their ratings.
What interests me are those situations in which the stock of a company, which appears according to all the indicators, to be doing pretty well on Main Street, suddenly plunges due to a "fault" on Wall Street. This would appear to be the case with AudioCodes, and the question that I would like answered is "have the sellers overreacted?" Note that after climbing ninefold, from $1.5 to $15.5 from the end of September 2002 to January 2004, AudiCodes began a downslide, which has continued to this very day. Last week's announcement of a possible missing of forecasts for the first quarter of the year sent it down to $6.60, its lowest price in three years, reflecting a market cap of $284 million. In response, the analysts were quick to downgrade their ratings for the stock, something that hardly helped investors' sense of security, to put it mildly.
Yahoo! Finance reveals that 11 analysts currently cover AudioCodes, with their earnings per share forecasts for 2007 ranging from $0.11 to $0.48. Zacks.com lists three analysts who forecast losses of $0.11-0.16 per share, so one can't rely on the consensus. The sole conclusion that the average investor can reach after studying all this is that no conclusions can be reached at all, and when that's the case people move on to another stock, where logic can be applied. Yet despite all this, AudiCodes rose from sales of $44.2 million and a loss of $8.4 million in 2003, to sales of $164 million in 2006, with profit (according to the various estimates), coming in at $10-12 million. The company currently has $80 million left in cash, after making a number of acquisitions. True, AudiCodes appears to have fared better in 2005 than it did in 2006, but that still does not explain why the stock has been falling over so long a period on Wall Street, while the company itself has turned in a pretty good performance on Main Street.
During 2006, cable and telephony companies staged a takeover of the VoIP sector. The blow recently suffered by the "mother of VoIP," Vonage Holdings Corp (VG), in its battle with Verizon Communications Inc. (VZ) over patents, created anxiety on Wall Street about the future for all the small VoIP companies. The cable companies now control 71% of the entire VoIP sector in the US. So the fear is that the likes of AudiCodes will be forced out of the race. On my understanding of the business model in this sector, this does not look logical to me, since there nothing to stop AudioCodes continuing to engage in the subcontracting business that it has done until now.
If you look at Vonage's graph last year, and even more importantly, over recent months, you will realize just how much of an effect the "Mother of VoIP"'s fall has had on stocks like AudioCodes. Vonage dragged down the entire sector, but it is not AudioCodes' competitor. The company, which still holds more than 20% of the VoIP subscriber market in the U.S., competes with Comcast Corp. (CMCSA), and Time Warner Inc. (TWX), while AudiCodes subcontracts for these companies.
I believe that the psychological effect that Vonage has had on the entire sector was excessive. I have long since learned that, on Wall Street, shadows of mountains can appear like mountains in the short-term, so it looks to me that while caution must of course be exercised, AudiCodes is certainly worthwhile checking out as a buying opportunity. This is the time for the smart investor.
AUDC 1-yr chart
Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.