Networking company A has been in business for almost three years,
generating revenue for 11 straight quarters. Last week it reported
revenue growth of 110 percent over the year-ago quarter and, excluding one-time
charges, a 33% reduction of its net loss.
Networking company B didn’t ship its first product until May, has only
one customer and a net loss of $19.5 million (51 cents per share) in the
year ended July 31.
So which company’s stock soared and which sank last Friday?
The stock that took flight belongs to Company B,Sycamore Networks (SCMR), whose first day
of trading yielded some staggering numbers: Priced at $38 per share,
SCMR opened Friday at 270 before closing at 184 >, a 386% gain. In 1999,
only MarketWatch.com has had a more dazzling IPO debut, finishing its
initial day on the ticker at 474% above its offer price.
Sycamore, which makes optical networking products for telcos, ISPs and
cable companies, now has a market capitalization of $14.3 billion,
making it worth more on paper than all but a half-dozen other Internet
stocks. (SCMR was trading Monday afternoon at 185 3/4.)
Friday was not as kind to Ramp Networks (RAMP), whose stock fell 52 percent that day
alone after the company failed to meet analysts’ estimates and
executives warned of widening losses in the near future due to increased
spending on R&D and sales and marketing.
Ramp, which makes Internet routing products for the small and home
office markets, reported Q3 results last Thursday which showed revenue
grew to $5 million in the quarter ended Sept. 30, up from $2.4 million
in Q3 of last year.
But net loss increased to $3.6 million from $3.1 million in Q3 ’98,
though the recent loss includes a $1.2 million one-time charge for legal
and severance costs. Excluding that, Q3’s net loss was 12 cents a share,
compared to 20 cents per share in Q3 ’98 (when there were 5.3 million
fewer shares).
However, the consensus analysts’ estimate was that Ramp’s net loss would
be 10 cents per share. For missing that mark, the company was punished
by investors. RAMP shares plunged 11-1/4 Friday to close at 10-1/4. After
rallying briefly Monday morning, the stock was down again in the
afternoon, trading at 9 7/8.
I believe the market overreacted in both cases. Sycamore’s IPO benefited
unduly from heavy pre-offering buzz generated by a number of things: 1)
The company is playing in a market that investors and analysts love –
bandwidth and infrastructure; 2) It is targeting huge customers (another
investor favorite) such as telcos, ISPs and cable companies, and; 3) Its
lead underwriter was the prestigious Morgan Stanley Dean Witter.
Ironically, Ramp was pummeled for warning that profits may not be on the
horizon soon – the same exact warning given investors by Sycamore in its
S-1 statement (“We have incurred significant losses since inception and
expect to continue to incur losses in the future.”)
At the 9 7/8 per share price, Ramp is valued at $200.3 million and is
trading at 12x trailing 12 months revenue. Compared to companies such as
Juniper Networks (JNPR) (115x TTM revenue), WorldGate Communications (208x) and
Redback Networks (RBAK) (138x), that makes Ramp look like a bargain.
I expect Ramp’s stock to recover as investors regain their perspective.
As for Sycamore, if it expects to maintain its lofty valuation, it hadbetter land another customer.
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