Amateur drag car racers often like to rev up their engines, signaling to opponents and spectators alike that they have the necessary horsepower to get the job done. These unnecessary demonstrations mean little, of course. What matters is the race itself.
I was reminded of this after watching Accelrys' (NASDAQ:ACCL) recent stock performance. The company develops molecular modeling and simulation software for the chemical and life sciences industries, and is regarded as one of nanotechnology's pick-and-shovel plays. Late last week, Accelrys reported that first-quarter orders were up 88% over the year-ago period.
You'd think the market would have enjoyed this news, given that Accelrys' customer base includes AstraZeneca (NYSE:AZN), DuPont (NYSE:DD), Hewlett-Packard (NYSE:HPQ), Eli Lilly (NYSE:LLY), and Amgen (NASDAQ:AMGN). But the stock closed down almost 3.5% on Friday.
Why? Management failed to offer any future guidance. Naturally, this unwillingness to rev its engines and announce its goals made investors uneasy. After listening to the conference call (I didn't participate in the live event), I am inclined to give Accelrys' management the benefit of the doubt. When asked about their refusal to offer guidance, they responded that they didn't want to be constrained from making tough but necessary decisions in the short term that would pay off in the long run.
As a long-term investor, I tend to like this type of thinking. Too often, companies make short-sighted decisions just to meet their next quarter's projections. For the past year, Accelrys management has been dealing with its spin-off from Pharmacopeia (NASDAQ:PCOP) and the integration of SciTegic, which it acquired last year, into the company.
Management didn't specify what -- if any -- type of engine tinkering might be needed, but given all of these issues, it's not unreasonable to expect that they may still have some tough strategic choices to make.
On the positive side, Accelrys appears to have a lot going for it. Orders are increasing, the acquisition of SciTegic appears to be paying off, its order-renewal rate is "north of 90%," and the company still has nearly $63 million cash on hand.
Furthermore, the company's Nanotechnology Consortium -- an alliance intended to accelerate the development of nanotech software tools -- is proceeding nicely. The program's international membership includes Corning (NYSE:GLW), Fujitsu, the Franhofer Institute, and the Japan Advanced Institute of Science and Technology. The Consortium has the dual advantage of introducing these potential customers to its software while allowing them to provide Accelrys' programmers with fine-tuning feedback. This information should help keep Accelrys' software competitive.
The main reason I remain bullish on the company, however, is that its software is used by biologists, chemists, and material scientists for everything from product design to drug discovery and development. Be it at the academic or corporate level, quality software tools such as Accelrys' will be essential. The need to view, characterize, and understand materials at the nanoscale will only increase as nanotechnology continues to become a more prominent component of so many different businesses.
So while management may not be revving its engines to the satisfaction of all investors, I like the quiet hum of its motor. In the next two quarters, I expect to see Accelrys' rubber hitting the road as it makes serious progress toward long-term profitability.
Finally, no article on a company this small (Accelrys' market cap is $140 million) would be complete without a big disclaimer: Tiny stocks carry big risks, including a general predisposition to volatility. If you want to invest, tread carefully; limit orders are always a good idea in micro-cap land.
Ready to swoop in on nanotech as it takes flight into commercialization? So are we -- and you can get free 30-day access to our Motley Fool Rule Breakers newsletter, which covers nanotech and other high-potential stocks, by simply clicking right here.
Fool contributor Jack Uldrich has been thinking small since grade school. He is the author of The Next Big Thing is Really Small: How Nanotechnology Will Change the Future of Your Business. He owns shares of Accelrys and Eli Lilly. The Fool has a disclosure policy.
