To Earth And Below? Avici’s Ticker Descent

When it launched in late July, the initial public offering of high-speed
router maker Avici Systems looked like a throwback to last year’s red-hot Internet IPO
market.

A challenger to Cisco Systems , Juniper Networks and Lucent Technologies in the booming high-end Internet router
market, Avici soared 212% on its opening day of trading on July 28 to close
at $96.75.

Seven days later, shares of AVCI closed at $163.50, giving any investor
lucky enough to get shares at the $31 offer price a 427% profit. Not a bad
week’s work.

Since Aug. 3, however, AVCI has experienced a choppy but rapid descent from
the IPO heavens. Shares are down 39% this month alone, and at Wednesday
morning’s price of $100.13 (and falling), Avici is threatening for the first
time to dip below its debut closing price.

That Avici’s IPO has been one of the top-performing Internet offerings of
the year – its first-day performance ranks No. 11 out of 114 total should
be no surprise; even as other ‘Net sectors suffer, infrastructure plays
continue to attract investors. Juniper, for example, is by far this year’s
leading Internet stock, with a YTD gain of 235%.

Even better for Avici, the company’s terabit switch router is designed to
connect fiber-optic networks, one of the high-tech market’s most popular
sectors on Wall Street.

So too it should not surprise that Avici’s stock has plummeted in recent
weeks, for widening losses, a sudden outbreak of perspective among investors
and a surprising hedge by the company’s underwriter have brought shares back
to Earth.

In early August the company reported Q2 losses of $26 million, or $5.11 per
share, up from $10.4 million, or $3.24 per share, in the year-ago quarter.
Accumulated losses through June 30 total $126.3 million.

August’s Q2 report also served to remind investors that Avici has virtually
no operating history. Founded in 1996, the company didn’t even begin
generating revenue until this year. Through two quarters, sales have totaled
$2.7 million, all from Avici’s one and only product. (This is a company that
had a market capitalization of $7.2 billion at the beginning of September.)

And given its miniscule market share, heavier losses can be expected before
things turn around, especially since Avici is trying to crack a sector
dominated by networking behemoths. With only 1% of the North American switch
and router market, Avici is a long way from holding its own against Cisco
(48% share), Lucent (27%) or even Juniper (9%, but fast-growing). Avici also
trails Marconi (8%) and Nortel (7%).

What this all adds up to is an overvalued stock, something even Avici’s
underwriter, Lehman Brothers, acknowledged on Aug. 22 when it started
coverage of the company with a “neutral” rating, a virtually unprecedented
move in a market where underwriters usually act as shills.

In his report, Lehman analyst Mark Sue wrote, “While we are enthusiastic
about Avici’s prospects, we believe current share price levels may already
reflect the impressive and open ended nature of the company’s market
opportunity.”

With the router market expected to grow from $2.1 billion this year to $15.8
billion by 2003 (according to telco market research firm RHK), Avici’s
market opportunity is great indeed. Lately, though, it appears investors are
focusing less on Avici’s future and more on its sobering present. Until
Avici can increase revenues and market share while controlling or decreasing
losses, expect further downward movement from its stock.

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