CallWave, Inc. (CALL) is continuing with the implementation of a revised business strategy and is redirecting resources to products focused on fixed-mobile convergence. In addition, the company has shifted to indirect selling (focus on phone companies) from sales and marketing addressing consumers directly.
Although these changes incorporate additional business risks and will result in net earnings losses, they are expected to provide top-line sales momentum over the next two years. We believe the challenging transition to a new business model (which is more dependent on wireless services and sales through local phone companies) and exposure to competitive offerings in the market will continue to limit stock appreciation.
We see limited downside potential with $50 million of net cash and indications of product acceptance at tier-II carriers. The past several quarters have been a transitional period as the company initiated the redirection of focus to fixed line-mobile service convergence solutions from legacy fixed-line business offerings.
The strategic shift has resulted in higher up-front costs and is expected to impact net earnings losses along with greater use of available cash over the next two years. Nevertheless, the company expects to return to revenue momentum as it leverages indirect selling through phone companies.
On the basis of price to sales (price/sales), CallWave is trading at 2.5x sales, primarily due to lower estimated revenues for 2008. We believe the stock will trade at such metrics given the changing business fundamentals and the challenging competitive environment. To CallWave's advantage, the company has significant cash on its balance sheet and, therefore, we set a target price of $2.30 near its cash position and based on limited growth over 2008. We maintain our Hold recommendation.
Rangana Bhattacharya contributed to this report.
Read the full analyst report on CALL.
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