We maintain our Sell recommendation on Soapstone Networks (SOAP) as we believe there is a lot of uncertainty surrounding the company's forward revenues. We thus keep our long-term outlook for SOAP unchanged, even though strong end-of-life router sales drove better-than-expected revenue and a higher cash balance towards the end of 2007.
We believe that Soapstone was unsuccessful in trying to identify a buyer for the company, and instead has chosen a strategy of entering the software business and exiting the equipment business that has generated the bulk of revenue. Although Soapstone's software initiative could be a large profitable business if successful, it is still in the very early stages. Soapstone is a virtual control plane project that is designed to take control away from the equipment and centralize it on a virtual software platform. Although the market for this is potentially large, we believe this is a risky initiative and don't expect profitability for several years even if it is successful.
Without meaningful current revenues and limited visibility into future revenue, our price target on SOAP is based on the company's cash balance. We estimate that Soapstone will have about $6 per share in cash in six months and expect the stock to trade close to this range over the near term. As the stock will still be burning cash, it could fall below cash value. We therefore set a price target of $5.50 on the stock.
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