I wasn't surprised that Radisys (NASDAQ: RSYS) stock sold off after reporting Q3 results [beating both top and bottom line consensus estimates] and offering what appeared to be modest guidance for Q4 2016.
Investors are fickle, and a sudden mood swing can cause quite a price reaction in the less liquid microcap world. RSYS shares ended the session following the earnings report down 10%. Meanwhile, revenue was up 24% YoY and the company generated 7 pennies of non-GAAP EPS. Quite an improvement from a few quarters ago when investors viewed Radisys as a wasting asset and were calling for the company to break itself up [me included].
But telecom services is an inherently lumpy business, especially for small players with customer concentration. When coupled with Radisys' management comments that operating expenses would increase $3 million in 2017 and could lead to a non-GAAP operating loss in a particular quarter, investors decided to hit the sell button.
Longer term that will likely turn out to be a bad move [hitting the sell button, that is]. That is because Radisys is positioned to be a key benefactor of the shift to the NFV ecosystem via its new DCEngine line, its suite of NFV software solutions, including FlowEngine, MediaEngine and CellEngine and the potential role of systems integrator for NFV transformation projects.
Key points from the Q3 earnings call:
 Radisys fulfilled $65 million in DCEngine orders to Verizon (NYSE: VZ), and that represents but a fraction of the total business expected from Verizon alone over the coming years. DCEngine is playing in a massive TAM, and is unconstrained by a large legacy business to protect. I expect DCEngine can become a $1 billion+ product line in the years ahead as Radisys targets large Tier-1 CSPs, cable operators and webscale internet companies. At 15% gross margins, that is $150 million incremental gross profit dollars, or roughly the current market cap.
 Radisys is positioned to become a systems integrator for NFV transformation projects [via its professional services organization and first CORD PoC with a Tier-1 European CSP], and is viewed as a trusted advisor by CSPs with aligned incentives -- to deliver an open, multi-vendor approach to NFV networks. To that end, Radisys isn't conflicted like many traditional players like Cisco, Ericsson, Hewlett-Packard Enterprises, etc with large legacy revenue streams they want to protect and who want to sell proprietary, purpose-built boxes and software solutions [which the CSPs want to avoid]. This is changing the dynamic of bargaining power between CSPs and its vendors who historically get entrenched.
 Radisys is positioned to grow its software businesses at 20%+ CAGR over the years to come. That might be conservative if the company is successful in breaking into the session border controller (SBC) market with its new MediaEngine Transcoding Resource Function (TRF) solution. I'm not a technologist, so I won't offer more analysis here other than to say watching purchasing decisions of customers speaks volumes about who the winners and losers will be. Watching players like Sonus Networks (NASDAQ: SONS) and other SBC players struggle adds to the Radisys thesis.
Setting aside myopic quarterly results, it is clear that Radisys is playing in a much bigger and more disruptive market than at any point in its corporate history. The current management team, Board and employees have to be credited with pivoting the business to seize the opportunity ahead.
It's hard to say how big Radisys can become at this point in time. But there is certainly a lot of market cap up for grabs -- a lot more than Radisys' current $150 million market cap. Ericsson lost about $4.5 billion market cap the day following its disappointing Q3 2016 results.
My guess is a lot of Ericsson's and other incumbents' market cap will eventually wind up priced into RSYS shares.
To that end, I think there is a path to a $1 billion+ valuation for Radisys in time on the back of explosive DCEngine growth and higher value/margin software growth. I view Radisys as a venture-like investment opportunity [multiple x upside scenarios] with less downside given the company has a sizeable $200 million+ revenue business and is generating some cash.
Disclosure: No position in RSYS, but I may buy shares at anytime.