There are plenty of tech stocks that soared on their first day of trading only to come crashing back to Earth after the IPO euphoria faded. BroadSoft is not one of those tech stocks.
The company, which makes software that helps telecom carriers transmit calls over the Web, went public in June 2010 at a price of $9 a share. That was at the low end of the company’s $9 to $11 offering range. The stock then fell nearly 8% during its debut, closing at $8.30. Many people quickly wrote off the company. That would have been a huge mistake.
Nine months later, BroadSoft is now trading just below $50 a share. That’s a gain of almost 500%. The stock surged nearly 40% alone on Tuesday on the back of an incredibly strong earnings report.
BroadSoft, whose customers include most of the big phone companies like Verizon and Sprint, said Monday after the closing bell that sales in the fourth quarter soared 85% from a year ago. The company posted a profit of about $11 million, up from earnings of less than $400,000 a year earlier.
This growth is obviously impressive. But can BroadSoft possibly keep climbing from here? Brent Bracelin, an analyst with Pacific Crest Securities in Portland, Ore., thinks so.
Bracelin notes that only a small percentage of corporate telephone lines have been converted from legacy time-division multiplexing (TDM) switches to the software that makes Voice over Internet Protocol or VoIP possible. He estimates that just 4 million of 62 million business lines have shifted from TDM to IP.
"The excitement is less about what BroadSoft is doing today and more about how many more lines BroadSoft’s customers have yet to transition," he said.
A valid point. But investors probably have reason to be a little nervous.
The stock now trades at nearly 90 times 2011 earnings estimates. If that kind of valuation doesn’t hark back to the tech bubble days of the late 1990s and 2000, I don’t know what does.
Bracelin thinks BroadSoft is a good bet for the long haul. But he concedes that BroadSoft is likely to be a stock that traders will feast upon, increasing the chance that it will be insanely volatile in the short-term.
And for what it’s worth, short interest (the number of shares held by investors betting the stock will go down) was about 1 million shares as of mid-February. That accounts for about 9% of the total available shares outstanding. Not an insignificant amount.
Today’s move may attract even more BroadSoft bears. A user on StockTwits going by the name of ninanina65 commented that BSFT is the “short opportunity of a lifetime NOW at $50.” That may be a stretch.
Gilad Shany, an analyst with Baron Funds in New York, noted that just because a stock goes up sharply doesn’t mean it has to be overvalued. He said that small cap stocks, particularly ones that are relatively undiscovered, can move dramatically on good news. BroadSoft is a holding in the Baron Opportunity fund.
“When a stock moves so quickly, you do have to stop, think and reassess the investment thesis. But we still like the fundamentals,” Shany said.
But now that BroadSoft has graduated from IPO dud to tech stock stud, the pressure will be on to keep beating earnings and sales estimates by a wide amount. With a stock that’s priced for perfection, it may be a rocky road for BroadSoft in the coming months. — Paul