Adtran Valuation too Good to Ignore
Mar 18, 2020 by InvestorDestination Team
Before the global health pandemic and plunging oil prices rattled the market, the stock market has been rallying since the financial crisis. In the last decade, many technology companies awarded investors with triple digits stock gain, but Adtran, Inc's (NASDAQ: ADTN) stock lost more than 50%. Adtran's revenue concentration can be blamed for this.
Adtran generates more than 50% of its revenue from a few top ten percent customers. When those customers abruptly cut their capital spending, it will negatively impact Adtran's revenue and profitability. Its last two years' loss can be blamed on that. In recent years, the company has diversified its product portfolio and geographic presence. However, as its 2019 second-half results indicate, its largest customers still dictate its performance. Due to the nature of its business, we can expect that it will continue to have some revenue concentration. However, the company's SDN products, along with its SmartRG acquisition, are helping the company to generate recurring revenue. Last year while its margin and revenue declined due to slowdown in two of its largest customers' business, its revenue from other businesses grew by 20%.
The company offers products to facilitate broadband connection. Demand for faster connection is not going to slow down anytime soon. As communities and governments are trying to contain the COVID-19 epidemic, school closures and working from home have emphasized virtualization and the need for faster internet connection.
The current health crisis will slow economic growth and might cause a recession. During a downturn, Tier 1 customers will reduce their capital spending, which might negatively impact Adtran. But, during a recession, federal government fiscal policies to stimulate the economy might increase CAF funding, which will positively impact Adtran.
The company has a strong balance sheet. At the current stock price, its stock generates a 7% dividend yield and has a compelling Total Enterprise Value.
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