In a year when hundreds of Internet companies have been punished severely
for poor financial performance, fiber-optic systems equipment maker Sycamore Networks
has been an investor’s dream come true.
It is one of the hottest names in one of this year’s only hot ‘Net sectors,
optical networking. Since going public last Oct. 22, SCMR shares have more
than doubled in value over their split-adjusted first-day closing price of
$61.59.
Then there’s the impressive bottom line. As the fourth-quarter ea
rnings report released after Thursday’s trading showed, the
Chelmsford-based company has moved solidly into the black in a surprisingly
short amount of time.
Net income in Q4 was $18.3 million, or 7 cents per share, nearly double Q3’s
net profit of $9.4 million, or 4 cents per share. In last year’s fourth
quarter, Sycamore had a net loss of $9.1 million, or 6 cents per share.
Yet the market reacted to SCMR’s stellar quarter by pushing shares down 4.6%
on Friday, and another 4.8% in early trading Monday. SCMR was priced at
$143.63 by early Monday afternoon.
What did investors see in the numbers that they didn’t like? Perhaps an
overvalued company.
With a market capitalization of $38.7 billion after last Thursday’s trading,
SCRM was valued at 195x trailing 12 months’ revenue of $198 million. Even
using Monday’s lower market cap of $35.2 billion, Sycamore is valued at 178x
TTM revenue.
But given Sycamore’s rapid revenue growth, TTM revenue figures aren’t
necessarily reliable indicators of the company’s value. Q4 sales reached
$90.4 million, up more than 50% from Q3 revenue of $59.2 million and more
than four times the $19.5 million in sales for the first quarter of the
fiscal year.
Once that last amount is replaced early next year by a revenue figure that
will exceed at least $110 million – and the company already has deferred
revenue of about $30 million – SCMR’s valuation immediately will become much
more attractive. Given the insatiable demand from telcos, ISPs and cable
operators – Sycamore’s target customers – to offer more bandwidth, revenue
growth likely will remain robust in coming quarters.
Most of the sell-off of the past two days is due instead to profit-taking,
as investors cash in on Sycamore’s rapid ascent since bottoming out in
mid-April at $51 per share. Anyone buying in back then could have more than
tripled their investment in about four months. While that kind of return was
routine in the Internet sector last year, investors have been quicker to
cash out this year while they can – one of the main reasons the market has
been so volatile in recent months.
It’s still pricey, but if shares continue to fall, investors seeking a
winning bet in optical networking should take a good look at Sycamore. The
company has all the markings and momentum of a long-term infrastructure
powerhouse.
