In my evolution as an investor, I now consider myself a business analyst rather than a stock analyst. What I mean by that is I'm less concerned with traditional value metrics such as sales, cash flow, earnings and book multiples. Rather, I focus on finding best-in-class assets before everyone else and let the numbers take care of themselves.
One area I'm focusing my time is on the next generation network architectures at Communication Service Providers (CSPs) called Network Functions Virtualization. In a nutshell, CSPs are converting their infrastructure to be more like webscale players like Amazon Web Services, Google Cloud and Microsoft Azure. To do that, CSPs are beginning to re-architect both their hardware -- Central Office Re-architected as a Datacenter [CORD] -- and running software on top of the commercial-off-the-shelf hardware to deliver differentiated services to subscribers.
My premise is small players like RADCOM (NASDAQ: RDCM) and Radisys (NASDAQ: RSYS) are early winners and will be key benefactors in this burgeoning industry with key wins at AT&T and Verizon, respectively. And that all signs point to a massive redistribution of market share -- and market capitalization -- to these small players and away from incumbents who are fighting tooth and nail to protect their legacy revenue streams at the CSPs. The incumbents' -- e.g., Netscout, Cisco, Dell, etc. -- problem is that CSPs no longer want proprietary hardware/software stacks from one vendor, rather CSPs want a more democratic supplier approach -- a multi-vendor ecosystem which will also reduce the bargaining power of big vendors who historically get entrenched in CSPs' networks.
NFV Cybersecurity & Service Assurance
While I believe NFV by itself is a huge paradigm shift in how CSPs will requisition services from vendors, it will also alter the way in which CSPs deliver services to their subscribers: it appears to be moving to real-time provisioning of services, pay-as-you-go model, similar to how the webscale players operate today in the cloud.
This new distribution method appears to be creating a whole new challenge for CSPs in terms of assuring the quality of those services delivered, but also how to invoice and collect on those services and also to make sure the network is secure as data speeds increase and new connected devices come online.
To that end, I think I've uncovered an interesting observation from various public sources of information with respect to RADCOM. I call this type of information collection the "investment mosaic." I try to find a lot of corroborating evidence in the public domain and connect the dots to find compelling investment ideas. This is why I consider myself more of a business analyst than a stock analyst - I'm focused on the competitive positioning of companies rather than valuation metrics [at least to start].
First, on the RADCOM careers page, there is a new position for a Product Manager - Visibility. The position requires experience with Network Packet Brokers, including Gigamon (NASDAQ: GIMO) and Ixia (NASDAQ: XXIA)
Taking the next step, at Gigamon's Analyst Day in May 2016, the Gigamon CTO spends a good deal of time discussing the past and future of the cybersecurity market. Historically, the focus was on threat prevention. The focus is now shifting to threat inspection/detection of ever increasing levels of information [or packets of information] traversing the network. This new approach uses the network as a rich source of information to analyze, rather than to keep threats out entirely [with all the new connected devices and virtualization of services, prevention isn't as feasible whereas threat detection is far more powerful]. And we know the core technology of RADCOM's MaveriQ product is analyzing packets of information via its virtual probe technology and providing analytics, intelligence and insight from those virtual probes of the information packets.
The next piece of the investment mosaic comes from AT&T's press release from July 2016 announcing its new cybersecurity platform and architecture, Threat Intellect.
The title in itself is telling: Threat Intellect "examines" billions of security events each minute and helps avoid attacks. This is exactly the type of use case MaveriQ is good at: hyperscale and automated examiner of information packets.
It seems entirely plausible that RADCOM could extend MaveriQ into the cybersecurity arena and multiply its total addressable market. I think it is a decent probability that it is working hand-in-hand with Gigamon given GIMO's business strategy and GigaSECURE visibility platform. When coupled with MaveriQ's packet inspection technology, the language in the AT&T Threat Intellect PR seems to line up with the language from GIMO's analyst day presentation and RADCOM's core competency. RADCOM even acknowledges cybersecurity as a new use case for MaveriQ in a marketing video.
In addition, we know that AT&T expanded the RADCOM relationship by adding a multi-year maintenance agreement and "high seven digit" product expansion into a new NFV category.
Given RADCOM is maxed out with 9 CSP trials for NFV service assurance transformation deals and the current $225 million market capitalization, I do not believe the market is pricing in any of this cybersecurity information or even discounting the probabilities of new NFV service assurance deals appropriately.
In my mind, RADCOM has all the makings of a big stock: a scalable business model with a huge runway for growth that is underappreciated by the market.
Disclosure: I own RDCM shares.