Quantenna Communications (QTNA) saw tepid demand for its public offering as shares actually fell a bit from the offering price. This is despite the fact that Quantenna´s wireless communication solutions are in great demand given the ever increasing workload on Wi-Fi systems.
Accelerating sales growth is welcomed as losses are coming down, a very welcomed combination of course. While sales multiples look reasonable given the circumstances, I am not convinced that the absence of gains on the first day of trading provides investors with a great entry point.
Quantenna faces fierce competition as it is very dangerous to extrapolate current growth trends into the future. I decide to add the shares to my watchlist, but for now will not initiate a stake.
Boosting Wi-Fi Performance
Quantenna designs and sells wireless communication solutions which are used to manage the ever increasing workload being posed on Wi-Fi networks. As the internet of things and smart appliances result in ever increasing workload for these kind of networks, managing this growth requires smart solutions, provided by the company.
Quantenna achieves superior performance for these networks by combining its own Wi-Fi systems combined with software expertise. This is needed as traditional gateways & repeaters are no longer sufficient to cover the additional demand.
The IPO, Appealing Sales Multiples & Accelerating Growth
Quantenna sold 6.7 million shares in the offering at $16 apiece, raising $107 million in gross proceeds. The capital raise and existing cash holdings will result in a net cash position of $115 million on a pro-forma basis.
Following the offering at $16 per share, shares fell back towards $15.50 on the opening day of trading, valuing the company at $508 million. This implies that operating assets are valued at nearly $400 million following the offering. For that kind of valuation, investors are investing into a rapidly growing player which is still reporting losses, but these losses are coming down rather rapidly.
Revenues totaled $83.8 million in the year 2015, up more than 25% compared to the year before. Operating losses were cut roughly in half in actual dollar terms, having fallen towards 8.3% of sales. This is a huge improvement compared to 2014 when losses exceeded 20% of sales.
Trends actually improved into 2016. Revenues growth accelerated towards 57% of sales for the first nine months of the year. Revenues of $91.6 million already surpass the total revenue number for 2015 as operating losses came in at just $1.2 million. The company was actually already profitable in Q2 and Q3 of this year as quarterly revenues came in at $34.1 million in the most recent quarter. At that pace revenues come in at a rate of $136 million a year.
That suggests that operating assets are valued at nearly 3 times annualized revenues. This looks relatively appealing as topline sales growth surpasses 50% and the company is already breaking-even, actually being marginally profitable.
Risk Factors Make Me Cautious
Any IPO is potentially very risky for investors and this one is no exception. Developing Wi-Fi solutions is difficult and can result in warranty liabilities. Other risk include dependency on a limited number of distributors and OEM´s. Competition is another great risk from the likes of Broadcom, Marvell and Qualcomm, each having much greater financial and R&D resources.
If the company indeed can become profitable and post decent operating margins, a 5 times sales multiple seems justifiable, as many profitable competitors trade at such multiples. That would warrant a $25 per share valuation. It could very much be argued that higher valuations might be justified if the company indeed become solidly profitable as the company continues to grow at a rapid pace.
Yet the ¨quality¨ of the company can be debated as well as it is a small emerging technology and relies on one sort of solutions, with little diversification within the product portfolio. It is furthermore hard to gauge how easy one of these larger competitors can underpin the technology, as it is often all or nothing for long term investors in such type of business. I look with great interest forwards to the upcoming quarterly results, and keep the company on my watchlist, but for now hold off making an investment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
