Taking Stock: Dog Days Leave Investors Sweating - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

IoT
IoT
Business & Finance
Commentary
7/30/2004
05:30 PM
William Schaff
William Schaff
Commentary
50%
50%

Taking Stock: Dog Days Leave Investors Sweating

A lot of trading activity this summer is causing some pricing volatility.

Technology investors have had a rough summer, and so have I. Maybe I should have gone to the Hamptons for the summer, but living in San Francisco makes the travel unappealing. Instead, I'm listening to more quarterly earnings reports.

Everyone talks about the big-capitalization stocks such as Cisco Systems, Intel, and Microsoft, but the technology landscape consists of much more than just those big companies. So to stir things up a bit, let's go over some middle-tier names in security.

I've mentioned Check Point Software Technologies, a leader in business firewall and security software, in the past. The company reported second-quarter 2004 results of $126.9 million in revenue and earnings per share of 25 cents. License revenue was $67.9 million. Despite slightly lower operating margins for the quarter of 54% and conservative EPS estimates for the third quarter, I believe the company should still earn about $1.03 and $1.13 (Wall Street consensus) per share for 2004 and 2005, respectively. Cash and investments on the balance sheet are a healthy $1.6 billion. Despite the fundamentals, the stock price dropped from $20.74 to $18.49 upon the earnings news, a fall of roughly 10.8%. The price decline since June 30 has been 31.5%. In my opinion, the risk/reward trade-off is starting to swing in the favor of long-term investors.

Another familiar name in security is Entrust, a provider of authentication software and secure messaging. It shared no revenue guidance for next quarter or for the fiscal year, saying it couldn't put a good estimate on future sales. Entrust's quarterly revenue of $19.5 million represented a decline of 13% year over year top line and -15% quarter over quarter. In my opinion, the stock may be cheap if the price goes much lower than its current $2.69, as the company has $1.64 per share in cash and equivalents. Like many smaller software companies, it continues to use service and maintenance fees (76% of revenue this quarter) to stay in business, because new license revenue seems to be scarce. Wall Street EPS consensus is a loss of 3 cents for 2004, but goes to a gain of 6 cents for 2005.

SonicWall, a supplier of security appliances for the small-office/home-office market, missed its earnings estimate by a penny. Given that the EPS estimate was 3 cents and it came in at 2 cents, it doesn't seem worth getting too excited over. For small-capitalization tech companies, the markets have been merciless when they disappoint. SonicWall went from $8.10 per share two days before it reported to $6.12 after the earnings report--a drop of 24% in two days, but some investors may have gotten some earlier insight about the bad news because the stock dropped more than 8% the day before the earnings release. Wall Street EPS consensus is still 13 cents for 2004 and 21 cents for 2005.

None of the numbers seem that horrible to me, but a lot of trading activity is causing pricing volatility. I think it's time to use up the rest of your summer vacation and come back Labor Day in the hopes that the market will behave a little more rationally.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
State of the Cloud
State of the Cloud
Cloud has drastically changed how IT organizations consume and deploy services in the digital age. This research report will delve into public, private and hybrid cloud adoption trends, with a special focus on infrastructure as a service and its role in the enterprise. Find out the challenges organizations are experiencing, and the technologies and strategies they are using to manage and mitigate those challenges today.
Slideshows
Top-Paying U.S. Cities for Data Scientists and Data Analysts
Cynthia Harvey, Freelance Journalist, InformationWeek,  11/5/2019
Slideshows
10 Strategic Technology Trends for 2020
Jessica Davis, Senior Editor, Enterprise Apps,  11/1/2019
Commentary
Is the Computer Science Degree Dead?
Guest Commentary, Guest Commentary,  11/6/2019
Register for InformationWeek Newsletters
Video
Current Issue
Getting Started With Emerging Technologies
Looking to help your enterprise IT team ease the stress of putting new/emerging technologies such as AI, machine learning and IoT to work for their organizations? There are a few ways to get off on the right foot. In this report we share some expert advice on how to approach some of these seemingly daunting tech challenges.
White Papers
Slideshows
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Sponsored Video
Flash Poll