I woke up at the Oregon Coast on Monday morning to a nice surprise: the Needham & Company analyst - Alex Henderson - raised his price target on RADCOM (NASDAQ: RDCM) from $17 per share to $23 per share, citing improving traction and acceleration of NFV purchasing decisions at potential RADCOM customers. RADCOM is currently trialing with 9 Communication Service Providers (CSPs), up from 5 earlier in the year.
Mr. Henderson was cautious on EPS over the next couple quarters given higher levels of spending at RADCOM to support potential new anchor customers. Yet, I don't believe RADCOM will trade on EPS in the next year or so -- rather, I think the stock will trade on landing new NFV deals. Based on the AT&T initial contract award and subsequent expansion deal, I think a good proxy for new NFV service assurance transformation deals is in the 3-year, $50 million ballpark with options to expand into other NFV use cases like cybersecurity.
Stated differently, $16-$18 million incremental revenue [Year 1 on the next deal] at 75% gross margin will add $12-$13 million gross profit dollars and lead to about $10 million of incremental pre-tax operating income.
To that end, a $6 per share price target increase equates to about $60-$70 million in additional market capitalization (6-7x the incremental pre-tax profits). In my mind, that is ultra conservative for deals that could lead to dramatic improvements to EPS in the years ahead.
My valuation is much higher than $23 for RDCM shares given where the company is positioned strategically, the expected growth of the NFV industry and the earnings leverage embedded in RADCOM's pure-play software operating model on a growing stream of revenue from potential anchor customers.
Time to go "surfing" -- literally and figuratively -- on RADCOM shares and at Short Sands Beach.
Disclosure: I own RDCM shares.