Atheros Communications (ATHR)
After looking through Netgear recently and digging through annual and quarterly reports, I came across one of their suppliers that also looks interesting on the short side. Atheros Communications (ATHR) makes many of the chips that go into wireless devices. The company’s product lines are included in many PCs, networking items such as routers and switches, mobile and WiFi phones, and many emerging wireless consumer electronics such as bluetooth devices and wireless gaming controllers.
The most recent quarters results came out with the company pulling in revenues above $100m for the first time. Revenues were up 38% and non-GAAP EPS was $0.25 up 47% from the same quarter last year. The PC business was a strong performer and the company is optimistic that lower prices in routers using the new 802.11n technology are driving demand and leading an increase in volume. The company mentioned the PAS (Personal Access Systems) which are used primarily in WiFi phones was a weak line, and this specific line had higher margins than many of the company’s other products. However, this line is a small portion of overall revenue and many analysts are willing to concede that this business will largely be out of the picture with other products picking up the slack.
The stock sold off as investors were disappointed with guidance for Q3. Management said revenue would come in around $105-108m for the quarter and EPS will likely be at or near Q2 earnings. This would represent 36% revenue growth and 37% EPS growth if the company hit the high end of its guidance. While this sounds like impressive growth, the numbers would solidify a trend of declining growth levels as the company matures and faces larger hurdles. After seeing sales ramp between 55 and 75% for the last year or so, now there will have been 2 quarters of growth in the mid 30’s which indicates the company is reaching a stage in its growth where the law of large numbers is beginning to catch up.
The company cited networking as being a lighter component in Q2 due to seasonal weakness. This is exactly the argument Netgear made (see previous article) as it released its quarterly results. Expectations are for this business to pick up in Q3 and Q4 but my assessment of the economy is that consumers and small businesses may be hesitant to spend much more as they see concerns with the prospects of the economy. Also, many who currently use an 802.11g type device will see little benefit in upgrading to a .11n device because they will be satisfied with the current level of service they get from existing devices.
My concern with ATHR is that it is trading at a small growth stock multiple and is maturing into a larger more established growth stock. This is part of the natural process of a company maturing and is admirable, but investors will likely begin discounting the slowing growth and placing a lower multiple on the stock. From a macro perspective, I think we are in a changing environment where risk will be a larger concern for investors and that will also cause a multiple contraction on many risky assets across all different sectors. I would use caution investing in this name and believe it is well suited as a potential short position.
FD: Author has a short position in ATHR
Barrons reviews ATHR after earnings announcement
Hi Zach
Seems to be a negative tilt to the posts of late haha? Any long ideas coming or are we going short all in??
August 30th, 2007 at 7:42 amKeep up the good work, I am bullish on some of the other larger fish in networking but there are always junky small fish in this space. Not familiar with this name….
Hey Mark, Thanks for the comment… Yes, you can tell I have a bearish tint to my view these days. I still have some long positions (CMG, FIG, ICE, FMD etc). Most longs are hedged with calls sold (premiums are high and it offers me some protection). One of the beauties of this business is that we can take advantage of good times and poor times. I’ll try to get back to a few long ideas for you as well.
Readers - if you haven’t seen it yet, you should check out Mark’s blog (linked to his name on the comment) as well as follow his virtual fund here
August 30th, 2007 at 7:48 amATHR certainly fits the mold of high growth companies maturing. I think you are right that the stock could be a good short. The current valuation of the stock appears a little high since the growth is decelerating quickly.
August 30th, 2007 at 12:53 pmZach, I like the CIEN story, particularly after the confirmation of earnings today. I blogged about it, but would like your independent thoughts - I assume with some of your looking at the networking names you have checked CIEN out in the past. Seems like they made some nice aquisitions during the bad times of past few years and have morphed from a pure optical play that I remember them as in the late 90s/early 00s to a much more broad telecom arms supplier. I’ve been buying in spades today both in personal account - I don’t see CIEN in your list of tickers so am not sure how familiar you are with the story. Also TSL has had a nice 2 day run but I have been pulling back on the name a bit. I posted a big write up on Yingli on the blog as well if you wish to read it, since you are a fellow solar bull/bear
p.s. teasing you about your bearishness. My biggest position now is TWM! (Ultrashort Russell2K) Granted when Big Ben speaks it might make the market feel warm and fuzzy but the underlying financial economy is going to need more than a few cuts and a nice bed time story.
August 30th, 2007 at 2:41 pmPAS has nothing to do with WiFi. PAS is a cellular technology used in China & Japan (http://en.wikipedia.org/wiki/Personal_Access_System).
August 30th, 2007 at 3:42 pmThanks Bug - I was trying to figure that out reading the annual report and it wasn’t very clear to me. I appreciate the clarification. At any rate, its still not a large portion of revenues and will be even less of a factor in upcoming periods.
August 30th, 2007 at 3:52 pmHi Zach,
I am curious what you think your edge is on ATHR? I am not long or short, but general comments about law of large #’s does not seem overly compelling to me? At one time CSCO, JNPR, MSFT, etc.. were all small/mid cap that eventually like all successful companies face this. Any idea what the TAM is for the embedded WLAN mkt is, are attach rates picking up? Or the corporate access point mkt?
Sort of scares me that people might use blogs to “get their short ideas out”. To me the analysis is almost 100% backward looking telling us what is already known, to me seems like the key is getting your arms around the earnings power over next 6-18 months vs what consensus expectations are?
September 5th, 2007 at 11:51 pmZach,
do you know anything about an overlap situation in the same
space, BROADCOM.
BRCM.. they have 20 intergrated circuit product lines
they claim to be number one in each one.
many are networking product lines. The stock chart has had a
modest 2 month bounce off recent multi month low points
and Cisco is biggest and happiest customer.
i got alot riding on this long, dont need a big
loser, any comment(s)
good or badwould be aprreciated many times over.
thanks for you professional excellence blog.
generic chart reading on ATHR… the stock had a harsh
September 8th, 2007 at 12:46 pm$10 dip in July downturn and actually bottomed earlier then
most. $35-ish down to $25-ish.
the dip buyers became in charge
on 8-7-2007 and the starter bounce has lasted 24 days
about 8 days longer then the discount rate cut index rally
(a rising tide lifting most boats) that began Aug 17th. the bounce 25-ish towards 31 is a whopping 24% and should turn off dip buyers barring newsflow to drive it further. i would not chase this bounce, which i estimate will have sharply dimishing velocity if not a real tip over, unless i had some concrete justifications. in sum this 24 day bounce is probably over.
Thanks for the comment Boris, I don’t have an opinion on BRCM at this point. Initial view, it looks like it has less to lose than ATHR as the stock has built a base lately and does not likely have many momentum players involved that may dump the stock quickly. At the same time it’s a bit expensive considering the fact their earnings have not been extremely impressive the last few quarters. Fundamentally there is probably a good reason for that higher multiple but I haven’t done the reading to figure it out.
Good luck and trade them well this week!
September 9th, 2007 at 6:51 pmZACH- check Barrons or NoteableCalls.com
September 10th, 2007 at 9:30 amto review a new report/opinion that says ATHR is worth $40.
had the staged article not been released ATHR might have traded down to 27.50- fir Monday. but you should review the bullish report with full consideration.
September 10th, 2007 at 5:53 pmfor wednesday…. Bank of America issues new buy ratings for ATHR and similiar BRCM. also end markets are hot, per
September 13th, 2007 at 8:53 ambreakout comments by John Chambers of CISCO Systems on earnings days 8/9/2007 that lifted BRCM 10% and ATHR 8% on DAY 1.
I’ve had to close out my short position on ATHR as it broke higher on increasing volume. I’m not always right, but i’ll cut my losses before they get out of hand. This may be worth keeping on the radar in case it breaks back down again, but in the interest of damage control I’m no longer involved.
September 13th, 2007 at 8:57 amZach,
I really like your effort on this website, but sort of confused here. You close out a short 2 weeks after recommending it short, when stock moves 3% against you?
Just trying to understand if you are doing fundamental research talking to suppliers, etc. or rather just making big macro calls on stocks with good/bad charts?
Lot of ways to make $ in this game, but not doing the homework usually ends up burning you in the long run.
September 15th, 2007 at 12:17 am