Shares of Ribbon Communications (RBBN +9.78%) skyrocketed on Wednesday. The single-day gains peaked at 32.7% in the early afternoon before settling down to a still-impressive 28% price increase at 2:30 p.m. ET today.
The provider of hardware and software solutions for secure communication networks reported modest earnings on Tuesday evening, but also unveiled an impressive contract with Verizon Communications (VZ 2.19%) amid generally improving market trends.
A big Verizon deal helped investors forgive weak quarterly results
Ribbon's results fell short of analyst expectations in the first quarter of 2024. Yes, that's an unusual setup for a huge stock-price jump.
Your average analyst had expected the small-cap company to report break-even earnings on sales near $185 million. In reality, the adjusted bottom-line loss narrowed from $0.02 per diluted share in the year-ago period to $0.01 in the most recent quarter. Revenue fell 3.5% year over year to $180 million.
NASDAQ: RBBN
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So the financial results weren't impressive, but Ribbon had other tricks up its sleeve.
First and foremost, it also announced a multiyear contract with Verizon. The company will help the telecom replace outdated call-routing and networking systems with Ribbon's cloud-based solutions. This network modernization should add $300 million to Ribbon's sales over the next three years -- a major boost for a company with annual revenue of less than $820 million.
Furthermore, CEO Bruce McClelland outlined several signs of an improving market environment. On the earnings call, McClelland said: "With our new Verizon program and the potential for similar engagements with other customers, we believe we've reached a low point and expect solid recovery in the business. We expect the new Verizon program alone to underpin this business for the next several years."
NYSE: VZ
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Ribbon's stock looks undervalued right now
This strategic deal with Verizon could be a pivotal shift. This expanded partnership (Verizon has been a Ribbon client for years) could serve as the foundation for Ribbon's future growth, setting the stage for further industry partnerships. A $300 million network upgrade with one of the largest telecoms in America should serve as a solid selling point in other contract talks.
For investors, the significant boost in projected revenue from this deal looks like a buying signal, suggesting that Ribbon's stock might be undervalued. Shares trade at 0.7 times sales and 8.8 times forward earnings projections today, and those numbers are quite low for a tech stock with robust growth potential. In other words, Ribbon could be a good buy today even after Wednesday's sudden price jump.
