Split Should Ease Recent Sonus Turbulence

Investors in ‘Net voice and data traffic switch maker Sonus Networks have endured a white-knuckle ride in recent weeks. Beginning July 25, SONS shares plunged 29% over six trading sessions, zoomed up 46% in the next three days and then lost another 24% the following week.

But at these altitudes, even that kind of heavy turbulence does little to spoil the view. Through Tuesday’s trading, SONS was up 314% from its May 25 first-day close of $50.50, making it far and away the top-performing Internet stock since it went public.

It also is one of only two Internet stocks to trade recently above the $200 per share mark. SONS closed Tuesday at $209 per share, dipping to $200.88 in late-morning trading on Wednesday. Among ‘Net stocks, only Broadcom , valued at $240.88 Wednesday, costs more on a per share basis.

Thus Sonus’ 3-for-1 stock split announced Wednesday comes at a good time for shareholders, easing some of the pricing pressure on a high-flying stock that appears to be bumping rather violently into a ceiling.

Split or no split, however, larger market forces also threaten to pull SONS down from its current lofty levels. Of the 18 Internet companies with market capitalizations of at least $10 billion, Sonus (at $12.2 billion) has by far the least amount of revenue, with Q2 sales of $6.5 million.

In contrast, another networking equipment provider, router maker Juniper Networks (with a $53.6 billion market cap), reported $113 million in Q2 revenues, while caching software vendor Inktomi ($12 billion) posted second-quarter sales of $61.5 million.

Trying to figure out Sonus’ value as a multiple of trailing 12 months’ revenue is impossible, since the company had no sales until this year. Even if the company reaches $40 million in sales this year (it had $7.6 million through two quarters), that would give it a valuation of more than 300x fiscal 2000 revenues. Expensive stock in anybody’s book.

Further, unlike most (though certainly not all) of the other Internet big-cappers, Sonus is bleeding red, with a Q2 net loss of $15.4 million, or 36 cents per share.

The financial trend, though, bodes well for the company and its investors. Revenue growth over Q1 was 496%, while more importantly, losses already are shrinking. Net loss in the second quarter was down from Q1’s loss of $16 million, or 41 cents per share. This indicates a company that is effectively controlling expenses, even as it ramps up to challenge giants such as Lucent, Cisco Systems and Nortel.

Bottom line: Boston-based Sonus Networks appears to be an emerging contender in the Internet infrastructure sector. But shares currently are overvalued. I would wait for a lower entry point and another quarterly report showing more progress toward profitability before jumping on board.

Death Row Update

On Tuesday we took a look at Internet companies trading below $1 per share
(‘Net Death Row Getting Mighty Crowded). Since then, one of the companies listed, e-tailer Beyond.com , has revealed that, pending an appeal, its shares would be delisted from the Nasdaq on Sept. 14 if it fails to meet market standards for stock price and assets.

The company’s stock must have a minimum closing bid price of $5 per share and certain assets of at least $4 million to maintain its Nasdaq listing. BYND was trading Weddnesday afternoon at 88 cents per share, and hasn’t been above $5 per share since March 30.

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