Allot Will Have to Contend with Cisco in DPI Space

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Includes: ALLT, CSCO
by: Shlomo Greenberg

I’ll take a look today at Allot Communications Ltd. (NASDAQ:ALLT), which was floated six weeks ago at $12 a share. It rose to $14.5 on the day of the IPO and is currently trading below its issue price. I read CIBC's research on the company, published December 26, in which analysts Ittai Kidron, Glen Anderson and George Iwanyc noted, among other things, that Allot’s field, DPI-based traffic management “is set for rapid growth, and that the company is well positioned to grab its share of this market opportunity.” They therefore rated it “Buy” with a target price of $15.

Allot’s claim to fame is deep packet inspection [DPI] technology. This is a technology that allows broadband service providers and enterprises to examine and network traffic in real time. In my ignorance I assume this information transmission system is more advanced than others, and will be suited to testing and monitoring information transfer over broadband networks. Since broadband is the future, there is no reason, the analysts feel, that Allot should not benefit, which sounds logical to me.

CIBC therefore believes this is an opportunity to buy the stock at a fair price. The problem, in cases like this, is determining what exactly a fair price is. CIBC expects the company to post EPS of $0.14 in 2006 and $0.32 in 2007, which would imply an extremely high historical multiple of 83 and 26 for 2007. But if Allot does indeed post this level of growth, it will certainly be seen in the stock price. Allot’s underwriters for its IPO were wrong, in my view, to let the offering go ahead at $12 a share, rather than the $9-11 range listed in the prospectus. The question is whether the listing at that price was worth the disappointment it subsequently produced.

Allot could encounter a stumbling block in the form of Cisco Systems Inc. (NASDAQ:CSCO), its main competitor. Cisco apparently views DPI as a niche with rapid growth potential, and in keeping with its usual practice, is making every effort to capture it. CIBC’s analysts believe that Allot has “the strongest technology of pure plays and has a technical lead on Cisco.” As I see it, everything will depend of the state of the market. If the gains continue, it will not take long for Allot to be discovered and the stock will head north. If, however, the market grinds to a halt or falls, you’ll be able to buy the stock at cheaper prices. The ball is in your court.

ALLT 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007. Republished on Seeking Alpha with full permission.