How Low Will Polycom Go?

Shares of Polycom (Nasdaq: PLCM  ) hit a 52-week low yesterday. Let's look at how it got here and see whether skies look clearer ahead.

How it got here
It's been an up and down year for Polycom, as earnings alternate between crushing expectations and falling short. As recently as January, the stock jumped after the company knocked its earnings report out of the park. But an early release last week revealed earnings well below estimates, causing a plunge that has led us to a new 52-week low.

Weak growth in the Asia-Pacific and North America regions were blamed for the shortfall this quarter. Competitors such as Cisco (Nasdaq: CSC  ) ) and even 8x8 (Nasdaq: EGHT  ) are nipping at the heels of Polycom's video business. At a time when Google (Nasdaq: GOOG  ) and Microsoft's (Nasdaq: MSFT  ) Skype are offering free services, it's hard to grow share in video solutions.

How it stacks up
Polycom isn't the only company struggling in this space from a stock standpoint. Cisco is seen as a major competitor, but the company's stock has underperformed Polycom over the past five years.

EGHT Chart

EGHT data by YCharts

Right now, value is what shareholders are going to have to look for in Polycom. Despite the recent challenges, Polycom has had a record of strong growth over the past few years and is still very profitable. With ample cash on the balance sheet, the downside risk is fairly low.

Company

Total Cash

Total Debt

Price/Book

Forward P/E Ratio

Polycom $535 Million $0 1.8 10.6
Cisco $46.7 Billion $16.9 Billion 2.1 10.1
8x8 $21.9 Million $0 5.1 27.1

Source: Yahoo! Finance.

What's next?
Polycom has been up and down, so a single quarter's results shouldn't alarm investors. Growth is still expected to be between 6% and 8% in the disappointing first quarter -- not bad for a company trading at 10.6 times forward earnings.

What has me concerned is the competition from free sources such as Google and Skype. Many of the services Polycom offers are available for free elsewhere, and while business may be willing to pay for them now, in the future they may not. Polycom is starting to present a pretty compelling value when you look at the balance sheet, but I'm worried about slowing growth because of this competition. First-quarter revenue hasn't grown sequentially since at least 2009 -- not a great sign for the company.

Value hunters may start sniffing at shares, but I don't see a catalyst that drives shares higher until growth picks up.

Fool contributor Travis Hoium manages an account that owns shares of Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services have recommended buying shares of Polycom, Microsoft, and Google and creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 12, 2012, at 6:14 PM, khaledmrd wrote:

    maybe Polycom acquire Lifesize from Logitech for Their Lifesize Connections new Cloud Service or as systemfor SME & Virtualization UVC platform & Enterprise

    a new trend of 2012 and beyond

  • Report this Comment On April 12, 2012, at 6:15 PM, GMZ374 wrote:

    Polycom has invested heavily in capital and people the past 18 months. It was predicated on revenue growth that hasn't materialized. A quote by the CEO, Andy Miller says just that. Loosely translated I would expect that will drive a sizable layoff of staff to get costs in line with revenue. That's not necessarily a bad thing but it will be very unsettling for the employees which could damage productivity, morale and even retention. No one with any current equity will see staying as a smart thing in the face of an uphill climb back to better earnings. With the job market heating up it's likely they will lose more key talent on top of the key talent that has left in the past few months. It's a bit scary to me.

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