Too Much Risk, Not Enough Reward

The good news: VoIP (Voice over Internet Protocol) is replacing TDM and that makes SBCs a must for carriers. Add in enterprises joining the party with Acme leading the way and you end up with a fundamental business model case that quite bullish.

This month Alcatel Lucent introduced its first stand alone SBC. But, this would on the whole be news in of itself since Alcatel Lucent has only offered SBC capabilities as part of other IP products, nevertheless it's even bigger news when you consider the reseller agreement that has existed between them and Acme Packet. In 2010, Alacatel Lucent accounted for 10% of Acme's business, just behind their largest customer, Verizon Business, which came in at 12%. So, what happens to this relationship? To quote Rich Crowe, Alcatel Lucent's Director of their Wireline and IMS business, "Our sales efforts will focus on our own product. ... We will OEM if a customer has a specific request." Not specifically what you want to hear out of a historically sizeable customer if you are long a 100 p/e stock.

What happened to the stock?

What happened to the stock? Try a 50% haircut in a few weeks. This type of action is par for the course when you are in a hot networking component or fiber name. Inevitably some unusually big customer takes a breather, and management is forced to come out and break the news. What happens then and there is always amusing. The market goes from extrapolating linear uninterrupted growth as far as the eye can see to absolute panic. The stock which was getting crazy upgrades and price target hikes ends up with a half dozen market performs. You can't in effect downgrade something you slapped a $60 target on yesterday to sell when it falls from $45 to $25 in one day, and severely reduced price targets. Some brave analysts will say buy as the noise/inventory correction won't last long, nevertheless the market pays no attention as the momentum has been broken. It's as late as this that you are stuck in fact having to buy and hold for the long haul to make the gains that were happening in a matter of weeks earlier the momentum was broken.

Guidance: While after all glowing there was a cause for some concern on the call. They are banking on a stronger second half. Usually that doesn't concern me, however when your an networking equipment vendor that has been seeing super strong order flow from a couple of clients and Verizon) due to network infrastructure transition; I worry a bit more about guidance in other words dependent on the 'usual' order cycle. Factor in the ramp up in hiring and you are looking at zero margin for error over the then couple of quarterly revenues reports. Again not where i want to be when a stock is up 300%+ in a year and no more than 10% of its all time high.