If absence does indeed make the heart grow fonder, then it took Kris Thompson with National Bank Financial a good long time before he realized what he was missing with network software company Sandvine Corp.
In a note Thursday, Mr. Thompson upgraded his rating to outperform from sector perform while maintaining a $2.50 price target citing a buying opportunity on recent weakness.
“We haven’t been positive on the stock for several years,” he said.
Wait, what?
“We’re upgrading our rating on Sandvine to outperform with the stock selling off considerably since the company reported weak Q1 results,” Mr. Thompson explained. “We are growing fonder of Sandvine’s channel revenue as the company’s technology leadership and network equipment vendor agnostic solutions seem to be in favour at many service providers.”
Mr. Thompson’s complaints about the company have been quite long. There are concerns that larger network vendors would win deep packet inspection (network software technology) deployments through technology advances within their edge routers, risk that revenue would dry up as its partners are also competitors, and the company’s high operating costs and poor expense management.
Recently, however, partners such as Huawei and Alcatel-Lucent do not appear to be replacing Sandvine deployments, so the risk of the company losing its competitive advantage against larger vendors appears to be lessening, he said.
“The one remaining complaint: We still believe that Sandvine’s stock is lagging its peer group due to limited profitability,” he said. “We’ve been vocal in our belief that Sandvine could be profitable today with lower operating costs. We understand the company has a very strong balance sheet and is investing for the long term. However, we believe investors would reward the company through a higher stock price with more prudent cost controls.”
Sandvine’s stock is underperforming competitors Allot Communications and Procera Networks Inc. due to high expenses rather than revenue uncertainty, he said.
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