Since publishing a series of articles on Atheros Communications, Inc. (NASDAQ:ATHR) the stock has been moving back to normal trading levels. In the recent past, a similar stock suffered the same fate that was destined for ATHR. We are referring to Syneron Medical (NASDAQ:ELOS) that flew to $40.00 only to retract to $18.00, now trading at $26.00 with ttm EPS of $1.49 (forward is $1.75) and a forward PE consistently less than 20. ATHR with a forward EPS of $1.00 was trading at $27.00, now down to $25.50 and heading towards $22.50. This is normal.
Though ATHR is in a totally different segment, there is an uncanny comparison between the two companies. There is limited upside growth while at the same time, virtually speaking of course, growth is unlimited!
Don't scratch your head!
The limited upside growth refers to the actual possible physical growth per annum. In the case of ELOS this is market size as production can meet any demand. In the case of ATHR it is the exact opposite that makes it the same. Potentially there can be a 100% or even 500% increase in demand yet ATHR is limited by its production capacity.
As ATHR is already running at nearly 80% capacity the upside is limited. It takes over six months to add capacity and then one has to take into account many variables. For instance; ATHR could add 50% capacity at a unit cost of X or 100% capacity at a unit cost of X less Y. However, if only 60% of the 100% added capacity is used, then the unit cost becomes X-Y+U, which is more than X. It's not so simple to add capacity without long term contracts in hand. In this business, obtaining long term contracts is not simple. We'll leave it at that for now.
Virtual growth is unlimited for both ELOS and ATHR. For ELOS, finding the right product mix (home devices) and cost could lead to an explosion in sales and income. It hasn't found the magic formula yet but is working on it. For ATHR, finding a way to add capacity cheaply and quickly in order to take advantage of a hot product could lead to revenue growth in excess of 50% per annum. In 2006, ATHR put to work a new facility that facilitated top line growth. We would all like to see ATHR pull the same monkey out of the same hat twice. Somehow we just don't think ATHR possesses this kind of magic. At first we thought the recent acquisition was for this purpose but have since learned otherwise. In this business, a hot product can quickly turn ice cold within a year or two. This too is a contributing factor when calculating production expansion.
Once again the two have the exact opposite problems. ELOS has the production but needs the product/market and ATHR has the product/market but needs the production.
Essentially analysts are expecting way too much from ATHR. ATHR has a very good management team but let's get real…they're not Houdini.