Radcom: Radically Misunderstood, Radically Overvalued - Part 2

| About: Radcom Ltd. (RDCM)
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Summary

Part 1 explained tech company Radcom’s predictive chart and nearly unobservable insider selling. The Part 2 supportive evidence shows, among other things, promotions and the analysts’ estimate beat were misinterpreted.

In this highly competitive software niche, established competitors’ R&D budgets will smash Radcom’s budget. A stock offering may be forthcoming if Radcom intends to try to gain a market foothold.

Radcom is among a group of companies owned by brothers who also count three publicly traded losers among their companies - two have dropped to $1 and change.

By Sonya Colberg, TheStreetSweeper Senior Investigative Reporter

In the first part of TheStreetSweeper's two-part series on Israel-based software company Radcom (NASDAQ:RDCM), we described the tech company's negative trends and predictive chart.

Now, Part 2 highlights the top three supporting reasons we expect Radcom will follow that chart:

1. Hype and the misunderstood analyst expectation beat.

Shares jumped 44 percent on the report Radcom revenue rose about a million bucks last quarter to $6 million, while earnings per share beat analysts' expectations (10 cents actual EPS; 3 cents analyst estimate).

But an analyst we spoke with speculated that the low analyst estimate may have been due to either a lack of information about Radcom or a desire to prep Radcom for a possible upcoming stock offering.

Indeed, it seems the sole true analyst covering the company for H.C. Wainwright put a "buy" and a $7.50 price target on Radcom last July. But the analyst puts a "buy" rating on most stocks.

There are examples here - a $5 price target on Finjan (NASDAQ:FNJN), now ~$3 - and here - a $50 price target on Silicom (NASDAQ:SILC), now ~$36.

And the charts below show other stock picks have gone bad, too:

Local Corp., LOCM, Analyst's Target Price=$4

Enthusiasm over Radcom's hype surrounding a revenue bump - "Our business is stronger than ever," CEO David Ripstein told investors - made the stock jump overnight from ~$6 to $9 following the Oct. 29 earnings call. Listen to the conference call here.

Despite the elation and stock run-up, Radcom still can't seem to attract excitement among institutional holders - or even its biggest fan.

It seems Radcom's sole analyst still has not upped that 4-month-old price target of $7.50.

Investors may find other viewpoints on Radcom here.

2. Dead ahead: Unless Radcom intends to tread in place, watch out for a stock offering.

Though cash has improved somewhat to $4.6 million, that's not enough to operate and grow.

Tech companies want to market to big companies. That takes stacks of money. So Radcom would need to hire engineers, researchers, marketers and distributors to improve and expand its one-product line - which launched 9 months ago - and then market any new ones.

A multi-million dollar equity raise would likely dilute current investors' shares. Yet, in this notably very competitive space, it would not be enough.

The raise would fail to boost Radcom's current yearly R&D budget of ~ $4 million to more than a tiny fraction of that available to numerous established U.S. rivals. For example, JDS Uniphase Corp. (JDSU) spends $296 million on R&D.

So Radcom will find it very tough to capture the necessary accounts with big telecom providers in the future. Radcom itself warns on page 14 about the additional burden of a typical 9- to 18-month evaluation process required to get a foot in the door with large telecom carriers.

So why would a big telecom provider such as Verizon (NYSE:VZ) want to buy products from a tiny, unknown, under-financed entity like Radcom? It would only make sense to go with tried-and-true giants like Oracle (NYSE:ORCL) or IBM (NYSE:IBM).

3. Altogether, Yehuda Zisapel and Zohar Zisapel own more than 34 percent of Radcom's ordinary shares. Three of the brothers' companies have been hit by decimated stock values.

The Zisapel brothers are sons of a shoe salesman who grew up to become successful entrepreneurs in Israel when they founded the Rad group of companies, including Radcom. Radcom's sisters include US publicly traded Silicom, Radware, RiT Technologies and Ceragon Networks.

But, other than Radware, these public companies have bombed for investors. The combined chart below shows how these companies' stocks have fallen apart.

In the past year alone, the share prices of the three companies have plummeted by 22 percent, 39 percent and even 64 percent.

Two of these stocks fetch just a few cents more than $1 per share. We wouldn't be surprised if Radcom eventually follows the trend set by its cheap sisters.

Conclusion:

Even under the most blindly optimistic of scenarios, we believe Radcom is moving toward the wrong side of the business equation recently described by a millionaire entrepreneur and current Shark Tank television star.

"There's two types of companies," Robert Herjavec recently said on Shark Tank, "The quick. And the dead."

But the aging Radcom - which has "generated significant losses" the past three years, expresses questions of continuing as a going concern, is now trying to break into a highly competitive niche using hype and a none-too-distinctive product, looks poised to sell stock, has lost ~76 percent of its value, and sports a negative predictive chart - has proved one thing...

This company is definitely not quick.

Disclosure: The owners of TheStreetSweeper hold a short position in RDCM.

Additional disclosure: The owners of TheStreetSweeper hold a short position in RDCM and stand to profit on any future declines in the stock price. Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.