CRNT - Ceragon Networks Could Trade Above Offer Price Of $3.08 With Its New Chipset Catalyst

Summary

• CRNT remains relevant in the industry with continued growth in its top line.
• It recently fended off an attempted takeover by AVNW, implying that the company is grossly undervalued.
• It remains an attractive investment opportunity in light of management's clarification of its long-term targets.
• Considering its growing operation in the US, CRNT is well-positioned to capitalize on growing opportunities in the US.
• This makes the company attractive in today’s bearish market.

Ceragon Networks Ltd. ( CRNT ) is a global leader in providing high-capacity 5G wireless backhaul systems. After the threat of a hostile bid from Aviat Networks, Inc. ( AVNW ) and a disappointing Q4 report, CRNT currently trades near its 52-week range. However, the company has recently cleared these issues. The announcement that the management successfully protected the shareholder interest at their recent 2022 Extraordinary General Meeting (“EGM”) could be viewed as a positive catalyst. In fact, the vote also shows that shareholders have faith in Ceragon's ability to remain competitive and continue to create value for shareholders. As such, it can be inferred that the majority of the shareholders believe the company's stock should be trading above $3.08 , the willing buy price set forth by Aviat Networks. According to the management, CRNT remains ahead of the competition and is set to release their new chip technologies, aiming to penetrate more customers and improve its margin. This makes the Ceragon attractive again despite the risk from today’s bearish macro environment.

Company Overview

Ceragon Networks has been investing in the development of new radio chips and system-on-chip ((SOC)) technologies, with the goal of improving its product offerings and expanding its market share, as quoted below.

Throughout 2022, we made significant headway in the productization of our new system on a chip technology, and we are on track and expect to finish productization in 2023 and launch our new product line in 2024. Source: Q4 2022 Earnings Call Transcript

This will enable the company to offer more powerful and efficient wireless backhaul solutions than its competitors. By being able to offer more advanced solutions at a lower cost, CRNT is well positioned to gain market share.

We strongly believe this system on a chip will drive strong demand and have a transformative impact on the industry and on our market share and performance, mainly due to two to three years' time to market advantage we expect to have over our competitors. Source: Q4 2022 Earnings Call Transcript

Additionally, the management remains confident that they are well positioned to continue growing.

We anticipate substantial growth coming from our E-band sales, especially with the new coming cost-effective product that enables covering a broader market base. We also expect that our sell-side routing and managed services businesses to increase in 2023 and beyond. Source: Q4 2022 Earnings Call Transcript

Its flexible portfolio has enabled the company to become a leader in the all-outdoor market segment. In fact, according to the management, CRNT has a growing share of 38% in the all-outdoor market segment, which is a testament to the strength of the company's wireless backhaul solutions and its ability to meet the evolving needs of customers. Additionally, considering its new chipset that incorporates 8 cores, which can provide significant performance improvements over the quad-core chips, the management expects a significant reduction in the bill of materials cost of approximately 40%, making CRNT well positioned for further margin expansion despite today's challenging environment.

With these catalysts in place, it is not surprising to see CRNT continuing to win more contracts with Tier 1 operators in the telecommunications industry globally. One of Ceragon's interesting catalysts is its continued growth in the US region. In fact, 23% of CRNT’s total revenue this FY’22 is derived from North America, up from 15% recorded in FY’21 and up from its 3-year average of 15%. This makes CRNT attractive and well-positioned to benefit from the increased federal funding for 5G initiatives, as shown in the image below.

Near 52-Week Low Range

It has been some time since CRNT has consolidated within its 52-week range. As of now, the stock is trading below both its 20- and 50-day simple moving averages, indicating that it may drop down to its support level around $1.50. If the price falls below this support zone, it could be an excellent opportunity to accumulate shares. Additionally, upon examining its MACD indicator, it appears to remain bearish, but keeping an eye out for a potential bullish crossover could be a significant catalyst to monitor.

Cheap CRNT

Today, CRNT is trading near its 5-year average book value per share of $1.84, with a trailing P/B ratio of 1.22x that remains undervalued compared to its 5-year average of $1.57 . Its forward EV/EBITDA of 7.47x is cheap compared to its 5-year average of 23.30x. Analysts are positive on the stock, with growing (Non-GAAP) earnings per share of $0.23 in FY’23, up from -$0.01 recorded in FY’22. This translates to a forward P/E of 8.30x, relatively cheaper than its sector’s median of 20.67x. With its improving financial performance, management remains confident and has reassured investors that they are aligned for further margin expansion, as quoted below.

… the more we see the market stabilize, the more we feel comfortable to aim towards the higher end of the range. Originally, we're indicating 34% to 36%. So already kind of indicator of 35%, there could be very probable scenarios where we, in the long run, go beyond 35%. Source: Q4 2022 Earnings Call Transcript

Based on the 5-year target of the management, total revenue will reach over $500 million and over $175 million gross profit. This will translate to a cheaper forward EV/gross profit of 1.04x, cheaper than its 5-year average of 2.11x. With this sentiment, it is not surprising to see a huge discount relative to the street’s average price target of $5.63 . This makes CRNT an attractive long-term investment, as of this writing.

Concentration Risk

CRNT's revenue decreased in the most recent quarter compared to the previous quarter and the same quarter in the previous year. The main driver of this decrease is that a significant portion of its revenue is highly tied up with few customers. In fact, according to the management, this is mainly due to one of its customers changing their policy, as quoted below.

Revenues were $75.5 million, a decrease of 3% compared to $77.8 million in Q4 2021 and 4.1% compared to $78.6 million in Q3 2022. The decrease is mainly attributed to a policy change by one of our customers regarding equipment received prior to year-end. Source: Q4 2022 Earnings Call Transcript

As both CRNT's market capitalization and customer base remain relatively small, it may continue to face similar concentration risks in the foreseeable future. If any of the key customers were to reduce their orders or change their policies to adapt with today's bearish environment, the company could experience a significant decline in revenue. If this were to happen, we could see disruption in margin growth, which would make this stock unattractive.

Final Key Takeaway

Despite the slowing top line in Q4’22 as mentioned earlier, CRNT ended FY’22 with positive growth in its total revenue amounting to $295.2 million, up from its $290.8 million recorded in FY’21. However, EBITDA declined to $12.4 million compared to its $16.4 million in FY’21. This is mainly due to inflated operating expenses and $4.2 million hostile attempt related cost. Additionally, AVNW disposed and reduced interest in the company to approximately 4%. With a reduced interest in the company, AVNW may not have the necessary voting power to call another EGM which could influence the company's future decisions. This could ease confusion and fear from mismanagement. Today, the management sent a clear message that the current stock price of CRNT is undervalued and could potentially be priced at over $3.08. This makes the stock attractive despite today’s temporary weakness.

Thank you for reading and good luck!

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