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.

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