When I first saw the name Acme Packet (NASDAQ: APKT ) in the business news, I
immediately thought of the Road Runner cartoons of my childhood. It turns out
Acme Packet is short for "Acme Packet Session Aware Networking." What this
actually means is anyone's guess, but for simplicitys sake, let's just say
it has everything to do with Internet communications. Beyond that, I couldn't
say. I'm not sure why the powers that be felt compelled to use the first two
words of its technology architecture as its corporate name, but that's their
decision. I certainly wouldn't name a business so generically, and while I
think this is a legitimate reason for avoiding its stock, there are other more
serious concerns. Read on, and I'll explain. Stock Price Acme Packet's first
day of trading as a public company was Oct. 13, 2006. Priced at $9.50, it closed
the day up 68% at $15.91. That's quite the opening. For the next 40 months, it
spent most of the time trading below its opening-day closing price. That's not
so good. However, its Q4 results announcement Feb. 2, 2010, changed everything
overnight. Revenues increased 22% for the entire 2009 to $141.5 million and
earnings by 47% to $17.1 million. Investors loved the news, driving its shares
up 30% the next day, forcing red-faced analysts to adjust their forecasts and
target prices. Its stock hasn't looked back since, hitting an all-time high of
$84.50 in April of this year. In a span of 14 months, it went from smallish
small-cap to decent-sized mid-cap gaining 528%. All for a company that's
expecting to do $320 million in revenue and $1.18 in earnings per share in 2011.
Management might be the second coming, but a 41% haircut in the past four months
is a reasonably strong indication investors aren't totally buying its mid-cap
status. Valuation Despite the haircut, it still maintains a $3.3 billion market
cap and an enterprise value 35 times EBITDA. Meanwhile, four of its competitors
which include Cisco (NASDAQ: CSCO ), Alcatel-Lucent (NYSE: ALU ), Nokia (NYSE:
NOK ) and LM Ericsson (NASDAQ: ERIC ) have a combined enterprise value of 17,
half of Acme Packet's. Who in their right mind honestly believes that a
company with less than half a billion in revenue, regardless of their margins,
is worth this kind of money? I'll be the first to admit that I'm technically
challenged and wouldn't be able to go two rounds with someone from Tech Crunch
, but I do know expensive when I see it. To confirm my suspicion that this is an
overly hyped tech story, I'll compare it to a decidedly non-tech company in
Hansen Natural (NASDAQ: HANS ). The creator of Monster energy drinks, considered
by many to be a mature business with slowing growth, certainly is at a different
stage than Acme Packet. That doesn't mean it can't bring the heat. In its
second-quarter report, it grew sales 26% to $462.1 million (which incidentally
is more than Acme Packet's expected revenue for the entire 2011) and net
income by 32% to $84.2 million. Those are good growth numbers for an established
business, yet its enterprise value is 15 times EBITDA, less than half Acme
Packet. Hansen's operating margins are just 260 basis points less than the
tech darling, and its revenue and earnings growth aren't too far off. To me, I
see one stock of substance and another with style. As they say in the
entertainment business, the sizzle is in the steak. Bottom Line Tech stocks were
starting to get a little frothy before the summer correction. More could be in
store. Whatever happens, I'd seriously consider selling Acme Packet and buying
Hansen Natural. For the risk takers out there, perhaps a long/short bet. As of
this writing, Will Ashworth did not own a position in any of the stocks named
here
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