E 5 Reasons Ikanos Communications Is An Excellent Short

Summary points:

  • Ikanos Communications (IKANis severely lagging behind the hypercompetitive telecom and semiconductor business.
  • Falling revenue, unending high cash burn and a weak balance sheet have reduced shareholder equity for 5 years in a row, and there seems to be no end in sight.
  • Dilution appears to be imminent (again). Its overpaid management has a disturbing history when it comes to diluting shares.
  • Despite the stock price at all-time lows, Ikanos still unwarrantedly trades at a premium.
  • Given how bad things are going, I believe shares are heading for 0. Ikanos is an easy short, it’s NASDAQ with plenty of borrows available for a low 1.5% fee.

Full thesis:

I believe we are amidst the top, or very near the top, of one of the strongest bullmarkets in history. So, as a contrarian investor, I thought it could be worthwhile exercise to look for overvalued stocks ripe for a profitable short. I recently spotted Ikanos Communications. If my research is correct, this stock sports the ideal features for a short. This brief article outlays 5 reasons why, and a risk section for a balancing bullish perspective.

Reason number 1: Ikanos Communications' DSL business is outdated.

According to their own website, Ikanos Communication designs, develops, markets, and sells semiconductors and integrated firmware products for the digital home worldwide. It offers various digital subscriber line -DSL- processors for a range of power carrier infrastructure and customer premises equipment devices. So far, Ikanos has placed all bets on VDSL, a ultra high speed DSL connection.

However, despite the over-promising stories on their website - talking about the internet of things and all that - the company simply doesn't deliver. Their offer so much (legacy) products that it's unclear what their 'killer product' is. The competition in the telecom and semiconductor is sky high, so where does that leave Ikanos?

Their efforts to innovate has shrunk 15% in 2013, and 10% in 2014, given the decline in R&D related expenses.

Secondly, is VDSL the future of broadband? Not really. DSL will soon be a thing of the past. The future now belongs to a new technology called G.fast. Ikanos understands this, as they are trying to shift to G.fast by teaming up with Alcatel Lucent (NYSE: ALU). But the promised G.fast chips prototype will not be delivered to Alcatel in Q2. As a matter of fact, Ikanos is still in a very early stage of development. As of now, they aim for Q1 2016 to go commercial, but given managements sad history with regards to keeping their promises, this could take much longer, if ever. A competitor called Sckipio says they are the first to come to market.

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Disclosure: Short IKAN. Please do your due diligence before investing.

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