What's Ahead for Aerohive After Its IPO

Discover why Aerohive could face some challenges after its recent initial public offering.

Apr 8, 2014 at 3:30PM

So far 2014 seems like a strong year for tech IPOs. Recently, Candy Crush Saga maker, King, and cloud-based education platform, 2U, among others, have gone public to varying degrees of success. Other companies are joining the trend, like cloud company, Box, famous for its online file sharing service, which recently filed for its IPO. In this environment, Aerohive (NYSE:HIVE), the popular networking company and vendor of cloud-enabled Wi-Fi access points, went public two weeks ago.

It raised $75 million, although it struggled to close the day at $10, the middle of its target price range. With the capital raised, Aerohive could be in a better place to contend with networking giant, Cisco (NASDAQ:CSCO), and Aruba Networks (NASDAQ:ARUN).

Weak financials
Although the company has a considerable top line, its bottom line is somewhat weak and shows no sign of improvement in the past few years. According to its prospectus, the company's revenue and net losses have increased consistently for three years. In 2013, its top line increased to $107.1 million from $71.2 million in the prior year. However, what should concern investors is its growing net losses, which increased from $24.7 million in 2012 to $33.2 million in 2013.

An important need for simplified mobility
An aspect of the market that Aerohive currently enjoys is the fact that enterprises are transitioning from wired network to cloud-enabled wireless mobility. Aerohive's main differentiation feature is that it allows its customers to integrate several, often complex, mobility tools into one single platform. Moreover, it has enough capacity for a large number of mobile devices to use the network efficiently.

As a result, medium to large enterprises can greatly benefit from this service, given that their network edge usually needs to support several devices for their operations. Since the alternative to this is acquiring expensive and complex wired networks, these businesses can benefit from an affordable and simple cloud-enabled mobility platform.

In a recent interview, Aerohive's CEO, David Flynn, rebutted that Aerohive could be a bubble by pointing out that the demand for the company's service is going up. He suggests that as the number of mobile devices increase, enterprises will find the need to recur to a large capacity network edge..

Aruba Networks is the second-biggest company in the market, and so a threat for Aerohive's beginning as a public company. Its stock recently experienced jumped, after an outperform rating by Northland. This group reported Aruba has increased its gross margin by 400 basis points since 2009 and is able to maintain this growth with its innovative software products, ClientMatch and ClearPass. In that way, the company could enjoy further future benefits as it handles competition.

However, Cisco Meraki presents a bigger threat for Aerohive. Cisco, the largest company in the networking market, reported impressive results in regards to its cloud-based networking platform in its second-quarter results. Meraki showed 100% year-over-year growth. Overall, Cisco has strong financials and a very popular brand, which makes it a preferred option for many customers. It recently beat the Street's expectations on revenue, and could see future success in the growing cloud market.

Still, Aerohive's CEO believes his company has an advantageous differentiation to compete against Cisco; Aerohive has a single, integrated architecture useful for small to large size enterprises, while Cisco has created three different architectures.

Final Foolish takeaway
Aerohive has some challenges ahead of its initial public offering. As of now, the company has a concerning bottom line, which has worsened in the past few years. However, it has consistently improved its top line, reflecting its current success in regards to increasing sales. An opportunity ahead of Aerohive is a possible growing demand for cloud-enabled networking platforms, given that the network edge in enterprises must support several mobile devices in order to efficiently run their operations.

Moreover, since Aerohive offers an integrated and affordable cloud-managed network edge, it can be quite appealing for medium-sized enterprises. With that being said, its competitors are strong in terms of sales and growth. Cisco Meraki has grown lately, while Aruba Network is regarded as a moderate buy due to its innovative software products and gross margins. Still, Aerohive's CEO believes that his company has a strong differentiation, and that it can properly take advantage of growing demand in the market.

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