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Allaire: Passing Storm Or Earnings Iceberg?

For investors in e-commerce application development software vendor Allaire , September has been a schizophrenic month.

It has featured several votes of confidence from Wall Street. Hoak Breedlove Wesneski raised its rating of ALLR to "strong buy" from "buy" on Sept. 1; Legg Mason Wood Walker reiterated a "buy" rating a week later; last Monday, First Albany reiterated its "strong buy" rating; and on Friday, Dain Rauscher Wessels also reiterated a "strong buy" for shares of the Massachusetts-based company.

Yet despite this visible support from financial analysts, Allaire's stock has fallen almost every day since Aug. 24, when it closed at $38.69.

On Monday that late-summer slide turned into a freefall after the company warned it will lose money in the third quarter because of declining sales and delays in contract closings.

The net loss, which Allaire officials said could be anywhere from 5 cents to 20 cents per share, comes in the wake of three consecutive quarters of profitability and will be woefully short of consensus Q3 estimates of a 7 cents per share net profit.

The news sent ALLR shares to a new all-time low of $10.31 on Monday morning, giving Allaire a year-to-date loss of 86%. Those numbers contrast almost comically with Dain Rauscher's target price (set three days ago, mind you) of $125 per share. Talk about timing.

For investors, the question is simple: Is this a one-time setback for a company that has been moving in the right direction, or has Allaire hit an iceberg from which it cannot recover?

The honest answer is that nobody knows. Allaire blames its revenue shortfall - Q3 sales of $28 million to $32 million will be well below second-quarter revenues of $33.3 million - on two factors: 1) The company introduced new products into the marketplace, which had a negative impact on sales and marketing of its flagship ColdFusion cross-platform Web application server, and 2) excessive and unanticipated lag time in the sales cycle.

Should this merely be a case of delayed revenues, then Q4 looms as a good one for Allaire. However, we won't find out at least until December (when the company may issue an earnings advisory) and perhaps not until late January, when ALLR releases its Q4 report.

In the meantime, though, one indicator to keep an eye on are layoffs: No job cuts, at least to me, means the company is confident that Q3 was an aberration. Pink slips, on the other hand, mean retrenchment.

If you're convinced this is a temporary setback, then you may want to load up on ALLR shares, for they are trading at a steep discount. Using the high end of Q3 sales estimates, Allaire's trailing 12 months' revenue will total $110.3 million. With a current market capitalization of $296.3 million, that means ALLR is valued at 2.7x TTM revenue less than half its revenue multiple of just four days ago.

Tempting numbers, but I think it's worth waiting a bit to make sure there are no serious cracks in Allaire's hull.