There's a BOGO Sale on Allot Communications

The world's top value investors love it when their best stocks ideas are selling at bargain-basement prices. For those investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one, get one" sale on their stocks.

Considering the rise of the mobile Internet, you'd expect Allot Communications (NASDAQ: ALLT  ) to be doing much better than it is. It sells deep packet inspection (DPI) gear to fixed and mobile broadband networks to optimize over-the-top Internet traffic. OTT, as it's called, is content, applications, or video (but particularly video) that is delivered over the Internet instead of through a service provider's network. Think of watching Psy's "Gangnam Style" YouTube video on your smartphone (OK, make that Megan Fox's bubble bath Super Bowl commercial instead). Allot's gear makes that experience smooth and seamless.

As obvious as the need is for it's technology, Allot's stock languishes, having lost half its value over the past five months. Still, you'll want to do your own due diligence before buying in to see if this is really a chance to pick up a quality stock at a severe discount.

Allot Communications snapshot

Market Cap

$440 million

Revenue (TTM)

$105 million

1-Year Stock Return

(18.9%)

Return on Investment

9%

Dividend and Yield

N/A

Estimated 5-Year EPS Growth

26.7%

52-Week High

$29.05

Recent Price

$13.90

% Below 52-Week High

(52.2%)

CAPS Rating (out of 5)

****

Source: FinViz.com. N/A = not available; Allot Communications doesn't pay a dividend

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

Giddy yap!
Google found that a half-second delay in returning search results caused a 20% drop in search traffic. The market researchers at Gomez.com say online shoppers expect a website to load in two seconds or less because a three-second delay will have them abandoning a site. Amazon.com agrees that as little as a 100-millisecond delay will cause a significant drop in sales. It's the same concept today with video. More than a second or two of buffering, and the user is on to the next thing. If it happens too often, maybe the user is on to a new network.

Unclogging the pipes
Allot's DPI technology polices the content of data being sent, identifies it, prioritizes it, and routes it to the proper location. If it finds a virus, it can block it, and if it identifies peer-to-peer downloading abuse, it can throttle back data transfer speeds. Analysts consider it the leading contender to win Verizon's (NYSE: VZ  ) business to deploy DPI technology as it implements a controversial "six strikes" policy to combat piracy. Violate the rules too often, and you'll find your speed reduced to a mind-numbingly slow 256 kbps. AT&T will also roll out its version and will punish violators by blocking their access to various popular websites.

Analysts had expected a first-quarter deployment, but now believe it will happen further down the road, as net neutrality rules for ensuring open and equal access make imposing such policies dicey.

Still, Strategy Analytics identifies the DPI specialist as the leading pure play in the field, ahead of Sandvine and Procera Networks (NASDAQ: PKT  ) , and they estimate the industry will grow into a $2 billion one by 2016. But Allot lost out to Procera on at least one opportunity to provide a large Tier-1 provider in Europe, a key market from which it derives half of its revenues.

Procera differentiates itself by focusing on the enterprise DPI market instead of the service provider end as Allot has done, though it does sell into that market, too. Last month, Procera purchased Vineyard Networks for $28 million to extend its reach into the enterprise DPI market, which it forecasts will grow into a $300 million market all by itself this year. With the growth of cloud computing, "bring your own device" connectivity, and software-defined networking -- which some Foolish analysts have deemed "the tech trend for the next decade" -- businesses need to monitor their networks just as much as ISPs do. Yet the European win coupled with its dominance in enterprise means Procera is a force to be reckoned with.

Buyout binge coming?
Acquisitions like Vineyards, however, could be the next catalyst for the network data management niche, particularly after Oracle's $2.1 billion acquisition of Acme Packet. And Allot Communications just might be grooming itself to be the next one.

In its earnings release, it says it is taking a charge for $15.9 million related to repaying grants it received from the Israeli Office of Chief Scientist. Companies like Allot receiving these R&D loans pay them back over time through royalties,  but in the interim they limit its ability to be sold to foreign companies. Repaying the money early suggests they think there is the possibility someone else might being interested in an acquisition and wants to clear the decks of any obstacles that might prevent it.

The upside is that over-the-top traffic is no longer a niche area of the Internet; it is the Internet market. That provides for significant market expansion opportunities, and that could mean a lot to Allot Communications.

Have half a mind
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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

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 February 11, 2013, at 6:22 AM, johshaw wrote:

    Your artcile contains many mistakes and thus hard to take seriously. Your revenue for Allot is way of the actual ttm revenues of $105m. Procera derive most of the revenue from service providers not enterprise customers. The main reason for Allot's share price reduction is significant drop in growth and a book to bill below 1 (possibly signaling further reduction in growth rate ?). So what does this mean - either the market for DPI solutions is slowing down markedly or Allot is loosing deals to Sandvine or Procera. Sandvine has had a number of poor quarters recently so if the DPI market is still growing quickly you could expect to see continued growth from Procera with book to bill well ahead of 1.

  • Report this Comment On February 11, 2013, at 7:25 AM, TMFCop wrote:

    johshaw,

    Thanks for the comment. You're right about the revenue number and I had relied upon a numbers aggregator (FinViz.com) to give me the total, which I'll get fixed. As for the focus on the enterprise market, I was referring more to the fact that Allot hasn't really gone after that segment all that much, it accounts for a very small percentage of its business compared to Procera, which of course, is also focused on ISPs but has targeted the enterprise niche more than its rival. Thanks again for your comments.

    Rich

  • Report this Comment On February 13, 2013, at 3:23 PM, jaymonroe wrote:

    These guys eased past $100M in 2012, 35% up on 2011 and, as mentioned in the article, look to be the clear leaders in the DPI space - seems to me like they are doing Allot right. I understand they have pretty good traction in mobile, two tier 1 mobile customers were mentioned by a previous guy and the word is they are the incumbent with some of the big European operators - seems they get this market better than most. They took a hit with a poor analyst review a few weeks back but their fundamentals look good and I reckon I'd have to agree with the title, they look good for a rebound. Also, jonshaw's comment about Procera's revenues coming from service providers is just wrong and the acquisition of Vineyard seems to back that up...

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