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Investors may be ON2 something (ONT)
Topics: UncategorizedWhen readers first suggested that I take a look at ON2 Technologies: ONT, I was skeptical. I heavily shorted smallcaps and microcaps from 2000-2002, and leaning on video codec companies was money in the bank. Every six to twelve months another company would come out with a new video compression algorithm that was going to revolutionize content distribution. The companies were always more hype than substance, and after a few disappointing quarters, their investors fled, leaving shorts like me with easy gains.
Admittedly, we are in a different era today. Video has come of age both on the world-wide web and, to a lesser extent, on 3G mobile networks. Still, video compression is a treacherous business with few winners and a lot of disappointments (as Neomagic (NMGC) shareholders know all too well).
After initial research, I think that my readers may have correctly pegged ON2 as one of the rare winners in the codec business. Its TrueMotion VP6 codec is included in Adobe Flash Player 8 and 9, and some consider its TrueMotion VP7 to be the premier video compression scheme today. The company also provides the Flix Engine to transcode video into mobile formats. ON2 is almost in the black, eeking out an operating profit but still posting GAAP losses last quarter.
However, it is unclear whether the prospects for ON2 stock are as bright as its technology. The company already has a market cap exceeding $318 million, indicating that investors have already priced a great deal of promise into the stock. Against this backdrop, sales remain relatively meager — only $2.815M last quarter. Annualized, that is only $11.26M, giving ON2 a price/sales ratio of over 28. In contrast, after backing out the cash on its balance sheet, video codec company DivX trades at a price/sales ratio of under 6. That doesn’t ensure a pullback, but it does lower the odds of repeating the rally ONT shareholders have enjoyed over the last 9 months.
If you have any thoughts on ON2, please leave a comment or drop me an email.
UPDATE: For solid technical analysis of ON2, check out Tim Knight’s work on The Slope of Hope blog.
DISCLOSURE: No position.
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Hi, What you are sadly missing here is a deeper research into exactly what this company has been doing. They are/have been/will be getting into millions upon millions of devices within the next 18 months. These devices include phones and TVs and let’s just assume they grab only a small amount of a royalty just from each of them – that means revs increase exponentially just on the royalty per device fee alone, never mind royalty per encoding action. This development is on top of clients like Brightcove and Move Networks, Skype, VeohTV etc etc. and their own latest Flash streaming technology that is just in it’s very infancy. They have also just/in the process of buying Hantro from Finland(?) who have many of the largest mobile/electronic companies as clients. Believe me, in 2008 11m revs will be small change as will $3 pps. If not, I’ll have a very angry wife (and rightly so). However, if I’m right or even nearly right, well I’ll be a happy man indeed. I have been with this co for years and have had many sleepless nights but no more, no more.
Dominic,
Thanks for the comment. I agree that that the ON2 codec is likely to grow rapidly in 2008. I would expect revenue to grow considerably as well. But the current market cap. suggests exponential growth, and I am not so sure about that. What are your revenue expectations for 2008, and how do you think the company gets there? Stay interactive.
You’re not including the proposed purchase of Hantro ($12M in Revenues) and what the NEW company will mean to the video space (embedded chipsets) and ONT’s position in this market.
why is company and its pumpers so secretive about why its former ceo was fired, whether or not he had done what whole foods ceo did regarding posting on message board/chat rooms about his company, and whether any ongoing investigations continue?
Also, Schwab apparently agrees with the writer’s assessment, having downgraded ont tonight from C (hold) to D (sell)
@Russ: you are correct — I didn’t include either potential revenues or share dilution from the Hantro acquisition in my back-of-the-envelope p/s calculation. Including both would lower the ratio, but it would still be high relative to DivX.
@Sep: I don’t consider the stock a sell and am not shorting it myself. I’m not buying it either. At any rate, I highly doubt Schwab agrees with me. Schwab generates ratings based on a computer model without human input, as I understand it.
Thanks for your comments.
You mentioned you’ve shorted similer stocks before. Is ONT a stock you would short? and why or why not? I’m holding for long term ,but talk to people who are shorting.
@John: I have no plans on shorting ONT. I think there is enough of a probability that the longs are correct that this one could be very dangerous on the short side. I will probably watch this one from the sidelines, and play it if at all on the long side using technical breakouts for my entries.
Just a note. Your column is posted to the ONT Yahoo MB. A very heated discussion on there. This stock is a very small part of my investment, but is one of the most interesting. I enjoyed your column, very well balanced.
@John: thanks for the heads up, and for your kind words.
No one has mentioned the past 7 consecitive quarters of over 20% rev. growth and with next quarters numbers comming out in the next couple weeks im sure it will read “ON2 Technologies post 8th consecitive quarter with over 20% growth as revs grow 46% from last Q”
[...] I liked the technology, ONT stock price just seemed too rich to me. I [...]