AuthenTec Update: Downgrade to Hold

After tearing through AuthenTec’s (AUTH) latest 10-k filing, doing some number crunching, and evaluating both the overall market and the semiconductor sector, and recent company developments at AuthenTec, I have changed my investment thesis to a HOLD for the time being.

If you own shares in AuthenTec, as do I, hang onto them.

If you don’t own shares, nibble at today’s prices, but be advised that a stagnant or declining share price could be in the cards for the next quarter or two.

Here’s Why:

I’ll break down this report into 5 parts:

• Earnings/Valuation: AuthenTec’s recent earnings and valuation metrics
• Conference Call Highlights: Managements discussion of business trends
• The Latest Product Announcements: 2 new fingerprint sensors
• Recent Patent Litigation: This time AuthenTec goes on the offensive
• My Reasons For Downgrade: Insider Selling, Sector/Company Valuation

Let’s get right into it.

AuthenTec Continues To Shine

Stellar Sales/Earnings/Margins/Guidance Above Estimates

The change in my investment thesis has nothing to do with AuthenTec’s latest earnings release for fiscal year end 2007. I have nothing negative to say on that front.

Let’s take a look at the growth trends and overall financial performance within AuthenTec‘s business over the last 3 years, with 2008 estimates where applicable.

Sales growth has been robust, with a strong acceleration from 2005 – 2006. In 2007, AuthenTec’s growth outpaced Wall Street’s estimates each quarter, ending up at a stout 58% in 2007. 2008’s growth is expected to moderate to about 43%, but again, this growth has already been revised upwards several times by analysts, and I expect they’ll continue to do the same as AuthenTec continues their business momentum. While not shown here, analysts expect growth of about 40% for 2009, so although things are slowing down slightly, this is still very heady growth for a small company like AuthenTec.

As for cash flow, AuthenTec has improved this line item each year, and is expected to do so again in 2008. The same goes for free cash flow, which took a bit of a hit in 2007 because of some one-time capital expenditures needed to grow and expand the business. Most years, because AuthenTec is a fabless company, their capex is very low, and therefore, as they approach break-even on the cash flow side, so to will their free cash flow.

Either way you slice it, AuthenTec is kicking some butt in terms of top line growth, and finally, bottom line growth in terms of profits as evidenced by their expected $.19 EPS profit this year, expected to more than double to $.43 next year.

Also, note that diluted shares increased exponentially because of their IPO.

Here are the highlights from their latest earnings announcement on February 4th, 2008.

As we can see, AuthenTec’s year-over-year comparison shows tremendous growth from the 4th quarter of 2006 to the 4th quarter of 2007.

AuthenTec also had their first operating profit ever as a public company, showing a slight gain from continued losses in the past, and this was the first quarter that they were profitable on both a GAAP and non-GAAP basis.

Since they weren’t public for the comparison quarters, obviously there is a large discrepancy in the earnings per share. From here on out though, the comparisons will be using roughly the same number of diluted shares.

Cash equivalents and investments totaled $66.3 million as of December 28th, 2007. The company has NO debt, and used about $720,000 in cash in the latest quarter.

Furthermore, AuthenTec raised their guidance for the 1st quarter of 2008 (which I think they will handily beat), on both the top and bottom line numbers.

Margin Trends

Looking at a company’s margins is critical to understanding their past performance and future prospects. Usually, businesses start out with smaller margins and they expand over time as the business becomes more efficient, and scales.

As we can easily tell from this table, AuthenTec has been scaling their business, and getting closer and closer to turning a profit.

In their latest quarter they finally were able to turn an operating profit, and it’s just going to get better and better from here.

Now let’s take a look at AuthenTec’s last 6 quarter margin trends.

Now this is what I like to see. Look at the steady ramp up of all three margins: Gross, Operating, and Net. Also note that their last quarter led to the first positive operating margin in their history.

These trends show a strengthening business that is poised for further growth and margin improvement. Any addition to their top line, will start dropping a bigger and bigger chunk to their profit.

Valuation

(Note: Valuation metrics calculated using $10.50 share price. Please adjust accordingly.)

Now that we’ve gone over AuthenTec’s financial data, let’s take a look at some valuation metrics.

• Discounted Cash Flow [DCF]: Using a modified DCF analysis, here’s what I get under 3 different scenarios:

Best Case Scenario: AuthenTec’s shares are valued at anywhere from $12.88 - $17.91 per share ($15.36 median)
Middle Scenario: AuthenTec’s shares are valued at anywhere from $8.09 - $9.97 per share. ($9.03 median)
Worst-Case Scenario: AuthenTec’s shares are valued at anywhere from $4.27 - $4.52 per share ($4.40 median)

So using this measure of valuing a company, I get an average share price range from: $4.40 - $15.36, taking the midline of each scenario.

With AuthenTec’s shares trading at about $10.50 as of this writing, AuthenTec looks fairly or slightly overvalued according to this metric.

More to the point, I believe the midline model is most accurate because it is conservative, while being realistic with growth rates and assumptions made about acquisitions and organic growth.

Therefore, using this metric, AuthenTec’s share value is trading in-line with its intrinsic value of about $9.00 per share.

Now, of course, DCF can’t be used on it’s own, especially in light of the fact that AuthenTec has no track record of profitability, and needs to be used along with other measures of value, so to that end, I have detailed some more valuation metrics below that are more traditional.

Bottom Line: AuthenTec is already trading at a “fair” value according to the DCF model that I am using. Because AuthenTec has so many shares outstanding, and is in a highly cyclical and volatile market, I would feel much more comfortable with these numbers favoring us more significantly than they do now.

Traditional Metrics:

To make things easier, I have created a table that includes all of AuthenTec’s valuation metrics vs. a few comparable companies that are public, as well as their overall industry, which is the Semiconductor - Specialized industry.

Since AuthenTec has no public company that it competes with directly (there are a few companies that make fingerprint sensors as a subset of broader product offerings), I made certain assumptions and chose certain companies that I thought matched up well with what AuthenTec does, and where I think they should be valued in terms of their growth prospects, margins, etc.

AuthenTec competes more as a faster growing specialized semiconductor company than a traditional semi company.

So, to that end, I included the following companies:

• Atmel Corp. (Nasdaq: ATML): Is the only US publicly traded company that competes directly with AuthenTec. Atmel engages in the design, development, manufacture, and sale of a range of integrated circuits [IC] products, which include fingerprint sensors. Atmel has also brought a lawsuit against AuthenTec for patent infringement.
• Zoran Corp. (Nasdaq: ZRAN): Zoran Corporation engages in the development and marketing of integrated circuits [IC] and related products used in digital versatile disc [DVD] players, movie and home theater systems, digital cameras, professional and consumer video editing systems, and digital speakers and audio systems.
• Cavium Networks, Inc. (Nasdaq: CAVM): Cavium Networks, designs, develops, and markets semiconductor processors for intelligent and secure networks. Its products allow customers to develop application-aware and content-aware networking equipment that securely processes voice, video, and data traffic at high speeds. The company’s products also include a suite of embedded security protocols that enable unified threat management [UTM], secure connectivity, and network perimeter protection.

Remember that all valuation metrics for AuthenTec are calculated using a $10.50 per share value.

• Price to Sales Ratio (P/S):

Price to Sales Ratio (P/S):

If we use this common metric for companies that have yet to turn profitable for any meaningful timeframe, we can see that AuthenTec is significantly undervalued when compared to its peers.

Its closest rival that also makes fingerprint sensors, Atmel, is trading at a P/S of .93, but actually had SHRINKING sales last year!

If we look at the other comparable companies to AuthenTec, the only one that grew revenues at about the same rate as AuthenTec, is Cavium Networks.

As you can see, Cavium garners a premium for their growth and profitability way above the industry norm, or compared to its peers as well.

The industry grew last year at an anemic 8.4% and the average P/S ratio of the companies within it was 4.3. AuthenTec is projected to grow sales 5 times faster than the industry average. That would warrant at least a P/S ratio of at least double the industry average, similar to what Cavium is receiving, at about 3 times the industry average.

Bottom Line: Fast growing companies always deserve a higher multiple than slower growing companies. I believe that AuthenTec’s shares are trading at a discount to this growth using the P/S metric by about 100%.

• Price to Earnings ratio (P/E):

Price to Earnings ratio (P/E):

AuthenTec just started earning a profit, so using a backwards P/E, and even a forward P/E ratio, isn’t as useful as other metrics at this point in AuthenTec’s growth cycle.

AuthenTec’s profit is going to explode in the coming years, but for now, they are negative in terms of their trailing earnings, and forward earnings are going to be low for a while as a result, but ramp up very quickly.

Analysts are pegging their earnings to be about $.19 per share in 2008 and $.43 per share in 2009, which I feel are both conservative numbers.

Remember, you pay for the future of a company, not the past, so let’s look at those numbers:

The industry average is 21.50, while their closest rival Atmel’s P/E ratio on a trailing basis was negative, and is expected to be about 19.0 for this year.

Using this metric, AuthenTec looks overvalued and rich, but again, a fast growing company (the average growth in their industry was about 8% during 2007) deserves to be valued higher, and remember that AuthenTec just became profitable, so a basic P/E ratio is almost useless until a few years down the line.

In addition, these numbers can change because AuthenTec has BEATEN analysts estimates their first 3 quarters as a public company, by $.01 to $.03 each time.

If they beat estimates by $.02 per quarter (taking a more conservative estimate) over the next 8 quarters on average, then the forward P/E ratios become much more reasonable even while they are still growing those earnings at a fantastic rate.

This makes their shares look much more reasonable, but that far out there is way more risk of them missing earnings (which will hammer the stock price) or some other business event happening (not to mention a slow-down in the business itself), that would bring these estimates into question.

Bottom Line: Using traditional P/E ratio metrics, while useful for more mature businesses, are not as beneficial to us in measuring AuthenTec’s true scale and eventual profitability at this time.

• Price to Earnings Divided by Growth [PEG]:

Price to Earnings Divided by Growth [PEG]:

The last number that I would like to use is what’s called the PEG multiple.

A good measuring stick to use for risk/reward ramifications, is to look for a forward PEG with some downside protection, so anything around 1 or less is usually considered less risky (although there already is plenty of risk involved when looking that far out ahead, which is why you want a lower PEG multiple and not a higher one).

In 2008 analysts expect AuthenTec’s earnings to grow to $.19 per share over a loss this year (2007) of $(-.01).

Assuming AuthenTec grows earnings from -$.01 this year and to $.19 next year, this would yield a growth rate of over 2000%.

However, here’s the catch: when using the PEG ratio, the calculation is usually taken out for 3-5 years. In other words, sure AuthenTec’s growth is absolutely stunning when looked at what COULD happen over the next 2 years or so, but what happens after that when year over year comparisons are harder to make?

What if the growth in earnings per share slows to 50% the following year (2010), and then to only 20% in 2011, and so on?

Well, if we look at the analyst’s expectations for this company (and to be honest I think they are conservative), they are giving AuthenTec a forward growth estimate of 35%.

That changes things and gives the PEG ratio of 1.54 (55.26 P/E / 35% Growth).

Hmm…doesn’t look like such a screaming bargain now does it?

But because AuthenTec is growing by leaps and bounds, this metric again doesn’t do justice to the overall picture of their growth and profitability trends.

If we take the analysts 2009 estimates of $.43 per share of earnings, we get a forward P/E ratio of 24.42 using 2009 numbers.

This yields a PEG multiple of .70 which brings us much closer to a fair and undervalued state.

But because these multiples are so forward looking, I don’t think it’s yet appropriate to put too much weight into them for purposes of valuing AuthenTec at this time, but put them more in a moderate bent for valuation purposes.

Bottom Line: Using the PEG multiple valuation metric, while flawed, gives us a better indication of AuthenTec’s potential, and its valuation. I believe that using this metric, AuthenTec is undervalued by at least 50% or more, which could prove conservative if they beat estimates again, and raise future guidance.

Other Valuation Metrics

I could go on and on with different valuation metrics, but I tried to stick to the most tried-and-true ones above, and the ones that offer the most realistic and comparable elements to other companies and the industry itself.

Because we are at a disadvantage (or extreme advantage depending on how you want to look at it!) when trying to pin down a valuation for AuthenTec, using traditional valuation techniques is difficult and an exercise in art more than science.

There are tons of other metrics that I could have used to further bolster my case for AuthenTec: things like Enterprise Value to sales, etc., but I could not yet use any tangible cash-flow or EBITDA valuations that require at least 1 year of profits before they are of any use to us.

To keep things simple, and because of a lack of historical and solid data to work with, every other valuation metric would present such a reach in the dark, that I would be basically wasting our time.

The reasonable way to do this is to take a few mainstream valuation techniques, as I have done above, and then once assured that the shares aren’t in another atmosphere and way overvalued, base your investment thesis on the underlying business and growth prospects, because in the end, everything else will come to fruition if the business itself is being managed in a healthy and prosperous way and fundamentals continue to improve.

Conference Call Highlights

Strong Push into M-Commerce

On the analysts conference call that AuthenTec recently hosted, management discussed the direction of the business and overall market trends. Here are some of the highlights of that call:

• In the PC market: revenue growth and design wins continue to be strong. They see obvious signs of macroeconomic-slowdown, but any seasonality lags will be made up via the fact that they are shipping in more laptops this quarter than the same one in 2007, and even in Q4, 2007. They expect their PC business to be up slightly from Q4 and significantly from the same period in the prior year.

Revenues should grow significantly in the second half of 2008 with the launch of the Intel Montevina laptops shipping later in the year, and expanding their integration into over 300 PC models by the end of the year, via the AES2810.

• In the Wireless Market: They will see a slight decline in their Q1 2008 wireless revenue as their largest wireless customer shifts their production from one phone model to the next with AuthenTec sensors in it, as they have historically done in the first quarter in the past.

Japan remains their largest wireless market, but they continue to see traction in the rest of the Asian market.

In late January, HTC announced the availability of the shift-mobile device, which they will be marketing in Taiwan and several other Asian markets, the first that integrates AuthenTec sensors, the second of which they will announce later in the year.

HTC is the largest windows mobile smartphone OEM in the world. They are incorporating AuthenTec sensors into .5 million PDA’s to support the US 2010 census.

They will soon be integrating the AES1711 wireless sensor (see below) for this market.

Management then talked about the first Personal Navigation Device [PND] by Medion, and the market opportunities for AuthenTec’s products beyond their core GPS and VoIP phones, etc.

• Continued Strength: Management continues to see strong interest in their products going forward, and believe that by 2009 they will really start to see more traction and integration of their sensors into new and upcoming products by several new manufacturers.

• Acquisitions: They are keeping their eyes open for acquisition opportunities that would integrate new functionality into their offerings.

Mainly, they are staying on the lookout for complimentary software capabilities that would help to round out their portfolio and drive incremental revenues in 2009 through margin improvements.

They aren’t necessarily looking to buy someone to diversify their portfolio, but to integrate more functionality onto their “piece of silicon” and software offering at the client level. In other words, strategic acquisitions only, that will add value to their product more than diversifying their product.

• Delayed Gratification: First 2 quarters of the year will be relatively consistent and flat, with the end of Q2 and Q3 being where you’ll start to see their revenue ramp up more.

• Q and A Session: When an analyst asked the CEO, Scott Moody if they were seeing any inventory glut of mobile devices impact their future sales, Mr. Moody said that the overall wireless inventory bump really has no bearing on their business.

- When asked about the PC sales, the CEO said they think their PC revenues will be up slightly from Q4, 2007, to Q1 2008, and any seasonality or cyclicality in this arena is not yet affecting them because they are simply being installed in more and more PC models overcoming the inventory issues.

- When asked by an analyst why their Q1 earnings guidance was lower sequentially, Mr. Moody stated that they are trying to grow their business and expand their product offerings. Also there will be some additional G/A expenses via their auditing expenses.

M-Commerce: Trials for M-commerce phones and applications are starting to ramp up. Point of Sale [POS] terminals are already in place to take M-commerce for phones, that already use cards or “fobs”, in the US.

Infrastructure is already in place, and they feel that with the competition in the cell phone market, manufacturers are always looking to differentiate their services and products from other companies and therefore, might be looking more and more into M-commerce capabilities in the US over time.

- In Japan, the AuthenTec phones came BEFORE the M-commerce capabilities, and were marketed as such for protecting privacy, etc.

Management thinks M-commerce will become a “killer app” with AuthenTec then becoming ubiquitous in this niche.

They need a relatively small slice of this market to become a “relatively successful company”.

They think the first phones will be marketed the same as they were in Japan, for privacy and protecting data via fingerprint sensors. Then they believe that going forward, it will morph over to that capability (M-commerce) as well.

Visa/Mastercard limit transactions to about $80 for the card sensors and “fobs”, and for the cell phones, they wanted to eliminate that limit, therefore, they required some type of authentication system, thus the cell phone providers provided a way to do that via AuthenTec sensors.

• Gross Margins: Management is targeting 52-55% gross margins going forward, but will ebb and flow due to new product introductions (lower margins), and ramping those up with better cost controls and yields over time (higher margins).

AuthenTec Continues To Innovate

Introduces 2 New Fingerprint Sensors

• AES1711: AuthenTec just announced a new fingerprint sensor for the wireless market, the AES1711, that offers an ultra-low power solution for today’s fingerprint-enabled feature phones and smart phones.

The new AES1711 consumes 88% less power in finger detect mode than earlier models, while continuing to provide the small form factor packaging required for today’s mobile phones, GPS devices and PDAs.

Already designed into new mobile phones that will ship later this year, AuthenTec’s AES1711 is ideally suited for external mounting on any mobile phone as well as other mobile devices, including GPS navigation devices and PDAs.

AuthenTec was also responding to customer demand when they made sure that the packaging provided a smooth, durable and aesthetically attractive appearance that is necessary with many of the fashion conscious and stylish mobile phone manufacturers and their ever-increasing demand for more integrated and seamless designs.

Finally, the AES1711 enables Power of Touch™ features like security, convenience, personalization, and navigation, offering wireless users ten customized application launch “hot keys,” (one for each finger), secure web launching, and next generation TrueNav^® for smooth on-screen menu and contact list navigation.

In addition, the AES1711 has been specifically designed and optimized to enhance a variety of near field communication [NFC] applications such as mobile payments (M-commerce), allowing users to easily protect a mobile wallet or authorize a payment with the simple slide of a finger, rather than typing PINs, passwords or lengthy security codes.

The AES1711 will begin shipping in volume in the 4th quarter.

• AES2810: Next up, AuthenTec just introduced their most comprehensive fingerprint design ever. The AES2810 is the first match-on sensor solution on the market today, taking advantage of the additional security provided by a single chip hardware solution, that provides all-in-one security for PC’s.

The AES2810 integrates the first ever personal data vault contained within a fingerprint sensor for the secure storage of usernames and passwords for pre-boot authentication, Windows and website logins, favorite websites and other personal information.

These and the other new features of the AES2810 make it the industry’s most comprehensive security solution to protect PC users from security threats such as identity theft, as well as ease the burden of maintaining password security.

The AES2810 integrates several components on the same device, including its proprietary RF-based sensor technology, a hardware security module and a matching engine that performs 128-bit encryption and decryption.

By combining all the matching functions on a single chip, AuthenTec can now enable Original Equipment Manufacturers (OEM’s) to keep costs down significantly, and increases the likelyhood of OEM’s and other manufacturers including a fingerprint sensor into their PC’s.

Already designed into dozens of new notebook models from the world’s leading PC manufacturers, the AES2810 will begin sampling this quarter, with volume production expected in the second quarter.

Like the AES1711 above, the AES2810’s new advanced packaging provides a smooth, durable and aesthetically attractive component for integration in today’s notebook and desktop PCs, and PC peripherals.

AuthenTec Patent Litigation

This Time AuthenTec Files Suit

AuthenTec Inc. announced on March 12th, 2008, that it has filed a patent infringement lawsuit against Atrua Technologies Inc. in the U.S. District Court for the northern district of California.

In its March 12 suit, AuthenTec says that Atrua’s products infringe multiple AuthenTec patents covering fingerprint sensor technologies.

“We filed this patent infringement suit in order to protect one of our most valuable assets, our intellectual property,” AuthenTec Vice President and General Counsel Frederick Jorgenson said in a statement.

Atrua CEO Anthony Gioeli said in an interview that the lawsuit was frivolous.

"This lawsuit is completely without merit,” Gioeli said, reading from a prepared statement. “We do not infringe on AuthenTec’s or anyone else’s patents. We will vigorously defend ourselves in this matter.”

“Everything we do in business is done with the utmost in honor and ethics, including our approach to intellectual property,“ Gioeli, continued.

“We certainly did not copy Authentec. We have researched and developed our own technology and have our own portfolio of patented intellectual property, which has been recognized as unique in the industry.

"In fact, the customer response to our offering validates that our solutions are exceptionally suited for the requirements of the mobile market. We have carefully reviewed the three patents alleged to have been infringed and we are quite confident that our novel products do not infringe. There is no merit to this lawsuit against Atrua, and we are unsure why Atrua has been targeted.“

According to that same statement, Atrua claims to have over 80% share of new fingerprint phone models launched in 2007.

So, add this to the list of potential distractions for AuthenTec, and an area where they will incur expenses for legal fees.

This was the latest information available as of this writing.

Stay tuned to PeakStocks.com for the latest on this situation.

Time To Downgrade

Risk/Reward Profile Not As Attractive

Now we get to the meat of this article.

Why the heck have I downgraded AuthenTec to a hold after so vehemently pounding the table for this stock since I started covering it?

I have my reasons, and they are as follows:

• Valuation Metrics Not Favorable: If you noticed in the valuation section above, basically the only metric that now favors us significantly is the Price to Sales ratio (P/S).

Further calculations utilizing discounted cash flow analysis, among others, show that at these levels, AuthenTec just doesn’t provide enough of a risk/reward scenario, despite the share price drop, that I would feel would allow me to recommend new purchases in this stock.

• Insider Selling: Even more disturbing to me, is the fact that even with the share price reaching all-time lows, insiders, and specifically the CEO have been selling into the weakness rampantly. This includes original investors like Harris Corp. (which initially spun out AuthenTec), and Advantage Capital Partners. Within the last couple of months (Jan-March 2008), original backers in AuthenTec have sold about 1.9 million shares on the open market, with Harris Corp. being the largest seller

This is even more disturbing in light of the fact that as recently as last summer (August 2007) the CEO was buying shares on the open market at prices HIGHER than where he sold them. Why the sudden change of heart? Other senior management has also been selling shares lately as well. This includes Anthony Iantosca VP Quality Operations (114,270 shares sold), and to a much smaller extend the CFO, and other VP’s.

The CEO, Scott Moody, has sold over 168,000 shares, with most of that coming in the last month (March, 2008), as the stock has reached all-time lows. This is not something I like to see.

If the stock was cheap when he made his purchases at $11 per share, then why sell now at $10 or less per share? Shouldn’ t he be backing up the truck?

On a positive, albeit very small note, Gustav Koven, a director, just recently purchased 2,000 shares on the open market (March 13th, 2008). I want to see more insider buying and at the very least, no more insider selling before I feel more comfortable with things.

• Overall Market and Sector Weakness: Normally I don’t care about what’s going on in the overall market, or a specific sector that a stock belongs to, for the simple reason that if that company performs and does what they need to be doing, eventually they will be found and their share price will reflect the true value of the company.

However, with that being said, because market valuations and specifically, the Semiconductor sector in particular, have come down significantly, I can no longer justify a purchase of AuthenTec shares especially with the risk/reward proposition not favoring us.

I believe that continued weakness in this sector, and the potential slow down in consumer spending, will be reflected in shares of AuthenTec, and other Semiconductor companies for months to come, REGARDLESS of the fact that AuthenTec for now, seems immune to these troubles financially because of their small size and scaling business.

Making matter worse, AuthenTec’s sales are typically slower in the first and second quarter of the year anyway, and I don’t feel that they will have any “blowout” quarters coming in the next 2 reporting periods, something that would be necessary to not get lumped in with the rest of the market or sector.

It could be that management senses the same thing, and that’s why they are selling some of their shares now.

• We’ve got time: While I am not necessarily advocating that you purchase shares in AuthenTec at this time, for those that have long term horizons and are patient investors (do you know any of those?), a small purchase at these levels with additional purchases on weakness would certainly look good several months or a year or so down the road, but don’t expect any price explosions anytime soon, unless AthenTec announces a blockbuster deal, or some other unforeseen event.

• A Final Word of Caution: Now, I’ve stated this before when it comes to AuthenTec and I think it bears repeating: because AuthenTec is such a small and rapidly growing company, it is very possible that its valuation will never be “cheap” or look like a great risk/reward proposition.

Some companies always garner higher valuation ratios, and quickly grow into them over time.

AuthenTec has a patented fingerprint sensor and method that no one else has, and is the #1 player in the fingerprint biometrics market. That usually garners a higher valuation, and a rapidly rising multiple on the stock when things do turn around in the overall market and perception and risk aversion to these types of stocks changes.

For that reason, I am keeping my shares of AuthenTec.

The company is sound, management is proven and still owns a sizeable stake in the company, and sales are growing at a rapid clip with signs of profitability and free cash flow just around the corner.

While there are risks involved to holding shares at these levels, I feel that because of the unpredictability of the market, and continued execution by AuthenTec and their management team, holding steady is the best course of action for now.

Bottom Line

Take a small dip into AuthenTec at these levels knowing full well that over time, you will be rewarded, but bear in mind that my initial investment thesis will take longer to play out than I anticipated because of the overall market malaise that is infecting all stocks, and especially some of the fastest growing stocks with low volumes and short track records with limited profitability.

Hold the course, and look to revisit the AuthenTec story in a few more months.

Disclosure: Long AUTH

Comments

[FWallace:]

Great analysis... thank you... ihow about On SemiConductor... this company along with the sector has taken a beating over the past six months. Your opinion is appreciated.

2008 Mar 28 03:05 PM