After several large carriers announced that they were not interested in using Soapstone Networks Inc's (SOAP) Provider Network Controller (PNC) technology, the stock price has fallen below cash levels. Although cash should continue to be a cushion for the stock, we expect the company to burn cash for the foreseeable future as the PNC ramp could be slower than expected and competition is likely to increase. As such, we maintain a Sell rating on the shares.
Competition in the PNC market looks poised to increase from other companies focused on carrier Ethernet, such as Gridpoint Systems and Ciena Corp. (CIEN). Although there is a need for a multi-vendor product, such as the one Soapstone hopes to develop, the market is still unproven. We believe this is a risky proposition with success far from certain.
With core router shipments complete, Soapstone has stopped generating cash until the software business can provide enough revenue to cover expenses. Assuming Soapstone is successful, we believe it could still take four to five years in order to generate positive cash flow. In the meantime, Soapstone will be investing heavily in development and burning through its cash balance.
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 approximately $6 per share in cash in six months, the horizon of our target price. As the stock will still be burning cash and the value of its PNC business is unknown, it looks likely that the shares will trade below cash value absent any positive customer developments. We therefore set a price target of $4, below its estimated cash balance.
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