What You Need to Know About Acme Packet Now

Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's a closer look at Acme Packet (Nasdaq: APKT  ) , Fool style.

Foolish facts

Metric

Acme Packet

Motley Fool CAPS stars (out of 5) **
Total ratings 441
Percent bulls 86.6%
Percent bears 13.4%
Bullish pitches 48 out of 53
Highest rated peers Digi International, Spirent Communications, Network Engines

Data current as of Dec. 30.

Acme Packet looks like the sort of stock you expect would make a short-seller salivate. Not only is the stock priced at more than 100 times trailing normalized earnings, but also its customers are telecom carriers and equipment makers. Alcatel-Lucent (NYSE: ALU  ) , Nokia (NYSE: NOK  ) , Sprint Nextel (NYSE: S  ) ... these are the sorts of companies that help pay Acme Packet's bills. Fools don't find this encouraging; they give the stock just two out of the maximum five stars.

And yet there's no denying the usefulness of the company's session border controllers. They're essential equipment for establishing and maintaining the sort of voice-over IP calls you'd make with Skype or Google Voice.

Looking back to look forward
With that sort of market position, you'd think there would be a fair amount of the enthusiasm for the stock here in Fooldom. You'd be right, but only because the rise of VoIP was a major theme in this year's tech coverage at Fool.com:

  • Every rich market attracts competitors, and the SBC market is no different. In June, Sonus Networks (Nasdaq: SONS  ) introduced a new switch for routing IP data. At the time, Foolish colleague Rich Duprey called the company a "worthy competitor" to Acme Packet.
  • Was Rich going too far? Maybe, but the proof is in the customer signings. In November, Acme Packet landed a good one: Sri Lanka's Etisalat Lanka, a subsidiary of UAE-based Etisalat Telecommunications. Investor buying in the wake of the news pushed Acme Packet shares up more than 10% in late trading.
  • Institutions piled in a month later, and stock -- already a four-bagger over the past 52 weeks -- is now on the verge of ending 2010 as a five-bagger.

But that's understandable. Acme Packet's financial performance reveals strong growth across the board as if demand for its pioneering SBCs has accelerated:

2009-2010 Quarterly Performance

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Revenue growth 34.9% 64.7% 62.3% 55.8%
Normalized net income growth 66.4% 200.5% 289.9% 218.1%
Gross margin 80.4% 80.8% 82.0% 81.5%
Return on capital 8.9% 15.2% 15.8% 15.3%

Source: Capital IQ, a division of Standard & Poor's.

And here's what analysts expect from Acme Packet over the next two years, according to data compiled by Capital IQ:

Capital IQ Estimates

2011

2012

Revenue estimate $293.4 million $384.8 million
Normalized profit per share estimate $1.03 $1.35

Source: Capital IQ. Data current as of Dec. 30.

Foolish outlook: bullish
Growth is the primary theme here. Acme Packet is on track to grow per-share earnings 80% over the next two years -- from $0.75 a share to $1.35 a share. The stock may trade for a premium, but that's only because the growth supports it.

Also, consider the market. Infonetics Research, a telecom market research company, estimates the cumulative revenue from SBCs will exceed $2.5 billion between now and 2014, and also that demand for SBCs will increase 44% annually over the same period. With Acme Packet's revenue still lingering at less than $300 million, there's plenty of room for the company to grow beyond its present valuation.

Now it's your turn to weigh in. What do you think of Acme Packet's prospects at current prices? Use the comments box below to explain your thinking. You can also rate Acme Packet in Motley Fool CAPS.

What will be next year's best stock? The Motley Fool has created a brand new free report called "The Motley Fool's Top Stock for 2011." In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Interested in more info on the stocks mentioned in this story? Add Acme Packet, Alcatel-Lucent, Nokia, Sprint Nextel, or Sonus Networks to your watchlist.

Acme Packet is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this story at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. When it comes to stocks, the Fool's disclosure policy is a lookie-loo.


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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 December 31, 2010, at 1:26 PM, tepidrio wrote:

    Your analysis is pretty good, but you have made one statement that needs clarification:

    "And yet there's no denying the usefulness of the company's session border controllers. They're essential equipment for establishing and maintaining the sort of voice-over IP calls you'd make with Skype or Google Voice."

    This is true, but what is not clearly understood is this: Session Border Controllers (SBCs) are required for ALL IP voice and data communications globally, not just for VoIP apps from Skype or Google. This is very important to wrap one's head around. All voice and data traffic, from all carriers, on a global scale, is either already carried as, or converted to, IP (Packet-based data), or will be in short order. Over 1,100 customers of Acme Packet, the vast majority of them carriers, including 92+ of the top 100 globally and the better part of the top 250, have deployed Acme Packet SBCs in their proprietary IP networks to manage the flow of packets.

    Those packets contain your phone calls NOW. Pick up the phone, and call anyone, anywhere - down the street or around the globe, landline or wireless, and there is nearly a 100% chance that your voice is packetized and passes through not one but many of Acme's SBCs.

    It was not the press release of a subsidiary of Etisalat Telecommunications that caused Acme shares to jump 10% in November. The press release was a coincidence of timing. It was the large investor community listening to CEO Andy Ory present at the CS Technology Conference that cause the jump - within about two minutes the start of the CEOs presentation the shares began to climb as institutions, funds, etc. took positions in APKT.

    The big guys get it - they do their own due diligence, they see the massive market opportunity for SBC technology and related hardware and software, and they understand that Acme's dominance has positioned the company to own a large share of a massive market.

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