2023-09-06 09:39:05 ET
Summary
- CMBM got my sell rating due to broken stock sentiment and lack of positive catalysts.
- 2Q23 results and FY23 guidance were below expectations, leading to a steep decline in share price.
- Challenges faced by Cambium Networks include corrections to unusually high demand experienced in 2022, increased competition with aggressive pricing strategies, unfavorable macroeconomic conditions, and reduced spending by service provider clients.
Overview
My recommendation for Cambium Networks ( CMBM ) is a sell rating, as I believe the stock sentiment is broken in the near term. No matter the positive, forward-looking statements provided by management, the market is unlikely to react to them. In essence, I see no positive catalyst to drive the stock price up or even maintain it at this level. The positive takeaway here is that there is going to be a new CEO who might turn things around. Until then, the stock is going to be left in the "winter" zone. Note that I previously gave a hold rating for CMBM as I wanted to review how the business would perform in 2H23 to ensure that the resilience performance so far in 1H23 was going to be sustained.
Recent results & updates
As the share price indicates, I was right in not upgrading to a buy rating previously as the 2Q23 results and FY23 guidance were horrendous, both of which led to a steep decline in share price (46% gap down). Readers may recall that I initiated a buy rating in early January as I was positive about the business as the continuous strong demand and expectation for suppler constraint to ease. However, I brought down my rating to a hold in February as I become very concerned about the bad macro backdrop and the cyclical variation in customer investment behavior.
Both revenues and EPS for 2Q23 were significantly below the street's expectations. This was largely due to sharp drops in Wi-Fi revenues. Revenue of $60 million for 2Q23 was lower than the consensus of $78 million, and EPS of $0.03 were much lower than the street expectation of $0.21. There was also a wave of guidance revisions below initial consensus expectations due to 2Q23's poor performance. For 3Q23, management now expects a revenue range of $62 million to $70 million, which is way below the consensus estimate of $86 million, and an EPS range of $0.13 million to $0.25 million, which is also below the consensus estimate of $0.30 million.
The problem I see with this weak performance and downgrade in guidance is that it impacts investors’ expectations on when growth will return. Based on the previous guidance, CMBM was supposed to see revenue of $332 million at the midpoint, or 12% growth. But, using the revised guidance, CMBM is expected to see a revenue decline of 9%. Management updated its FY23 outlook and is now guiding revenue to $265 to $275 million vs. prior guidance of $327 million to $337 million. This is a major shift in expectations, which I expect to lead to a series of downgrades in investors’ models, putting more pressure on the stock price..
In my opinion, investor confidence in the stock market is currently broken, and it will be some time before any investors will re-enter the name. As a result of the company's disappointing performance, I am switching my recommendation from hold to sell. I had high hopes for the company after hearing about their success in the Wi-Fi vertical previously, but my optimism has been dashed. It seems that the previous success has turned into challenges. The existing challenges stem from a correction to the unusually high demand the company experienced in 2022 for its Wi-Fi products when distributors over-purchased to counteract increased supply difficulties. In addition, with the increase in supply from competitors which are now coming at low price to gain share, it is likely to reduce the demand for CMBM.
Second, competitors now with plenty of supply became very aggressive with pricing in an attempt to regain market share. We saw the impact of these factors, especially in the last month of the quarter, given product shipments are heavily weighted to the last few weeks of the quarter based on distributor orders and requested delivery dates. from: 2Q2023 earnings call
If I were to guess the “timing” of demand normalizing, it would be sometime in mid to late FY24 as I believe management has subtly hinted on this during the call.
Number two, as I mentioned earlier in the call -- I'm not sure if you were on or not -- but we spoke about the fact that we're expecting Enterprise to get to a level -- a normalized level of $20 million to $30 million quarterly run rate by Q2 of next year. from: 2Q2023 earnings call
Additionally, there is a complication arising from unfavorable macroeconomic conditions and a reduction in spending by a wider range of service provider clients. This is creating additional obstacles for the demand forecast, affecting the anticipated expansion in PMP revenue for the company (management is counting on the introduction of Cambium's 6 gigahertz products to stimulate PMP revenue growth in the second half of 2023).
One last and very significant issue is that, in my opinion, the market no longer has any confidence in the management. Therefore, it is highly unlikely that the stock price will undergo a favorable re-rating as a result of any positive news or forward looking comments. The good news is that the CEO position now has another person helming it. This is the right choice as I believe it gives CMBM a legit reason to start afresh, giving investors another chance to believe in them. Morgan Kurk , the company's new chief executive officer and a seasoned executive with a track record of success at companies much larger than CommScope, has my full confidence. Kurk brings a wealth of technical experience to Cambium, which should help advance the company's product roadmap.
Summary
In conclusion, I am downgrading CMBM to a sell rating due to significant disappointment in recent performance and outlook. Despite management's positive statements, the market is unlikely to respond favorably, leaving the stock in a challenging position. The upcoming change in CEO offers a glimmer of hope, but CMBM is expected to face difficulties in the near term.
For further details see:
Cambium Networks: Rating Downgrade As The Business Significantly Disappoints