As more and more consumers are using cell phones for features other than just talking, networks are working hard to keep up with technology necessary to process the flow of data. Providers have begun moving from a switch type system that gives each user a dedicated line, to a packet system that uses a different protocol to divide up and re-transmit information with multiple users on the same connection. While this type of technology is Greek to most of us, Starent Networks (STAR) thrives on its ability to offer applicable services to wireless providers.
While the company just came public in June, the management is experienced in the area with most having served time with many of the top tier wireless firms. This is important because the company calls on these firms and has a high concentration in revenues from firms such as Verizon (30% of revenue), Sprint (20%) and Nortel (20%). While the high customer concentration poses a risk if one of the firms were to discontinue their relationship with STAR, it also validates the importance of STAR’s products if such firms are willing to give it these large contracts.
Starent holds an estimated 80-90% market share servicing firms using the CDMA technology. As clients are upgrading to the more advanced UMTS platforms, STAR is using its existing relationships to begin selling its new products that interface with the new technology. While it is still early in the game, Starent just announced a UMTS deal with a large client that most analysts believe is Vodafone. This new contract should help solidify STAR’s presence in the UMTS space and allow it to more aggressively pursue new contracts in this area.
Wireless data growth is by no means confined to the United States, and the company is active in international markets cementing contracts with many large firms across the globe. Industry checks show the growth internationally is about equal to that of the United States, with the Asia Pacific markets being the largest for mobile data. It will be important to watch how many contracts the company is able to sign in multiple locations in order to leverage their business.
Speaking of leverage, I was impressed in looking at the balance sheet and noting that after the IPO, the company has no debt to speak of and a significant amount of cash. This allows them to continue developing products, aggressively pursuing new clients, and management can concentrate on their overall business plan instead of courting the capital markets for additional funds. I am impressed with the name and while it is expensive, I think the growth prospects will pan out to be extremely beneficial to the company and to investors. Visibility is good as bookings have been strong for this year (translating to stable revenue for next year), and estimates are likely conservative as analysts are still becoming more familiar with the business model.
For a perspective on a wireless provider see my article on Metro PCS.
FD: Author does not have a position in STAR
Starent Networks Corp (STAR)
July 24th, 2007 at 5:54 pm
i will look at this one. any thoughts on activision. either fundamental or techniqual? the JUNE 2007 monthly NDP video game industry sales data on hardware and software went to press yesterday at 810PM. and ATVI had more marketshare gains. the tip is $2+ down towards $18 and might have potential to $20-ish. activision has some starter bounce action to mid 18s today by midday.
July 24th, 2007 at 6:27 pm
chipotles is having trouble holding 85 and then 84. the 7 day dip expands to $8. $92 > $84. you should consider buying back your calls.
July 24th, 2007 at 7:52 pm
i maximized cmg position in Tuesday afternoon selloff. average price of inventory is 82.90.
July 25th, 2007 at 2:49 am
You may be right about CMG… I’m concerned with it breaking through the 50 day on such strong volume. Definitely glad I had the calls today and wish I had sold 85’s or even 80’s instead of the 90’s. it will be interesting to see what kind of bounce the overall market gets tomorrow after such a negative day.
ATVI, I’m not real impressed with its quarterly sales and earnings stats. Obviously the environment is shaping up better for them, but they will have to execute very well to justify the multiple o the stock right now.
July 25th, 2007 at 2:45 pm
ATVI ….. good point on the rich pe ratio. the one thing that might overcome that valuation issue is the new-ish best seller Gutar Hero series, and this is the controvesy, does this title brand have sustainable popularity? McKee on Fast Money CNBC 8pm (use DVR) says ATVI is best positioned 3rd party title publisher. also likes Nintendo. but i agree with you in general.
August 2nd, 2007 at 12:39 am
Absolutely love your analysis on recent IPOs. I trade only IPOs. What criteria do you look for when taking an initial position or adding an existing one.
Thanks, Fantastic Analysis!
August 2nd, 2007 at 1:40 am
Thanks for the encouragement Fred, You might be interested in a service I subscribe to. Its called Morningnotes and they usually do a good review of IPO’s and secondaries before the issue takes place. Ask for Ben Holmes and tell him I sent you.
As for criteria, the first is that I want to see it trading above the issue price. If it cant hold that level, it will likely have overhead resistance as people wait for the stock to get back to where they bought it and kick it out there.
Next, I like to see good fundamentals. They may or may not be profitable yet, but the company needs to be growing sales and have a clear picture of when and how it will turn a profit.
After that I look at technicals and like to see volume drying up on a pullback hopefully soon after a successful launch. After the initial hype has worn off watch for the beginning of a positive move on a lift in volume and you’re often in for a great ride.
Hope this helps. Stay in touch!