What happened
Investors in Israeli wireless backhaul solutions specialist Ceragon Networks (CRNT +1.71%) have had an exciting week. From the close of trading on Jan. 13 to the close of trading Tuesday, shares of the "5G play" more than doubled in value on no news whatsoever.
But enough is enough. As of 11:15 a.m. EST Wednesday, Ceragon stock was down by 14.2%.
Image source: Getty Images.
So what
In a seemingly sharp reversal of opinion, on Wednesday morning, analysts at Needham & Co. cut their rating on Ceragon stock all the way from buy to underperform (i.e., sell) -- but not because they no longer like the company. The year is only 20 days old, notes Needham, and the S&P 500 is up only 1%, while Ceragon stock has risen 121% since 2021 began.
Fact is, Needham still "like[s] the company's fundamentals," reports StreetInsider.com, but all the momentum trading has clearly pushed this stock out of value territory.
"We think the shares will underperform the average total return of the broader market over the next 12 months," warns Needham. While there was a possibility that this wouldn't matter -- rumors were swirling that Ceragon might be "in play" and that a strategic buyer had appeared -- there has been no confirmation of this yet. And now, Needham worries that "the stock has exceeded [even] a reasonable take-out premium," taking that scenario off the table.
Now what
Long story short, Needham is downgrading Ceragon shares purely out of concerns about the valuation -- and I cannot really blame them for that. Unprofitable and with only about $8 million in trailing free cash flow, Ceragon currently trades at more than 65 times its annual cash profits. That might be reasonable if Ceragon's business were growing by leaps and bounds, but in fact, analysts forecast only a respectable, but rather staid, 15% long-term annual earnings growth rate for the company.
At its current valuation, I fear Needham is correct in predicting that this stock can only underperform from here on out.
