Avid Technology (Nasdaq: AVID ) utterly dominates pro-level audio and video production. Yet sales are growing at an anemic 7% annual clip, Avid hasn't reported a profitable year since 2005, and it also has an annoying habit of burning more cash than it generates. And I don't see an end to these depressing trends.
The stock jumped 18% on positive fourth-quarter earnings, but the first-quarter report raised more questions than it could answer. Piper Jaffray analyst Michael Olsen wants a smoother margin-improvement trajectory out of Avid, and the company reported a $0.02 first-quarter loss per share, while the average analyst was hoping for non-GAAP earnings around the $0.09 mark per share.
Avid fell as much as 16% on the news and has settled down to a 10% loss in late trading. That doesn't make it a buy-in opportunity.
Avid has to answer some tough questions before I'd consider investing in it. Most of all, I wonder what the company is doing to preserve or expand its market share in the face of a new wave of competition for its Pro Tools audio software and Pinnacle Studio video editor.
Let's pick the Pro Tools scab a bit. The leading digital audio workstation has long faced challenges from Steinberg Cubase and Roland's Cakewalk Sonar, but fought them off with ease.
- Ableton Live is gaining traction thanks to high-profile, professional users including rock heroes Nine Inch Nails and trance superstar Armin van Buuren. An enthusiast-level version of the software ships with Fender's digital amplifiers nowadays. How long before Ableton moves into the mixing booths of Hollywood as well?
- Adobe Systems (Nasdaq: ADBE ) just released the first major revision of its Audition package, formerly known as Cool Edit Pro, since 2007. Audition is now part of Adobe's flagship Creative Suite for the first time. That's a rival not to be taken lightly.
- And speaking of serious business, Apple (Nasdaq: AAPL ) is attacking Pro Tools on the high end with Logic Studio Pro and in the low-to-mid range with GarageBand. Damon Albarn and his band, the Gorillaz, released an album made entirely on an iPad last year, before the iPad 2 brought in better audio tools. I'd be shocked if Avid's weak audio results had nothing to do with the iPad GarageBand release.
- And then there's the open-source Ardour workstation, which is filling out its feature set in the upcoming 3.0 release and comes at the unbeatable price of free.
It's not clear how Avid plans to stay ahead of these hungry wolves. Until we know that, I'm not putting my money anywhere near this endangered dinosaur. Judging by Avid's one-star CAPS rating (out of five) and the stock's 50% freefall in the last five years, I'm not alone in that assessment.
Can Avid turn the sinking ship around, or is it too late? Add the stock to your Foolish watchlist to find out more about the company, and to stay on top of company news going forward.