Although strong end-of-life router sales are driving better-than-expected revenue and a higher cash balance, our long-term outlook for Avici Systems, Inc. (AVCI) remains unchanged. We believe Soapstone offers a unique product and are encouraged by its compatibility with Nortel Networks (NT) and Extreme Networks (EXTR) however, we expect revenues to ramp slowly. Throughout 2008, investors will likely be concerned about a lack of visibility into revenue growth from software.
Although recent results have been well ahead of expectations, this is a result of AT&T (T) buying additional routers before AVCI exits the business.
Our price target looks out six months, at which point product revenue for router sales in 2007 will be irrelevant to the company's valuation. With router sales complete, the stock should begin to trade on its current cash position, plus the value of a call option for the Soapstone business. We estimate that Avici will have $91 million in cash and equivalents in six months, or $5.35 per share.
Given that a company in the early stages that Soapstone is in, we believe a call option would still be worth very little. We, therefore, retain a Sell rating on the shares and set a price target of $6.50, which is approximately the value of cash and long-term investments on hand and $1.15 for the Soapstone business.
Read the full analyst report on AVCI.
Read the full analyst report on NT.
Read the full analyst report on T.
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