Dragonwave

DragonWave Inc is a small cap Canadian technology company that was the subject of a recent Seeking Alpha article. The link appears below. The company manufactures equipment that allows wireless providers to “pipe bandwidth” to cellular towers so that the end user will be able to access more data.

http://seekingalpha.com/article/2286813-dragonwave-after-yea…

The company is perched precariously between bankruptcy and strong growth. The following article outlines the risks going forward.

http://www.theglobeandmail.com/globe-investor/investment-ide…

This is a high risk/high reward investment that likely will not be of much interest to Saul and the other members of this board at least at the present time. I debated whether I should bring it forward for that reason. However I decided to do so anyway in the hope that some of you may find the information useful. The company’s quarterly report comes out on July 9/14.

Cheers everyone! Special thanks to Saul for sharing his knowledge and for providing leadership.

2 Likes

Hi CleverBear,

I read both articles, and yes I do occasionally take tiny flyers on far-out tiny companies (witness KRED currently), but why would you invest in Dragonwave?

It seems it’s about 65% chance they will make it, and a 35% chance they’ll go broke first. So why take the risk. Even if they hit all the enthusiastic estimates they’ll still lose money on the year. There are plenty of stocks out there that can double in two years and have zero chance of going broke (PFIE, AIOCF, UBNT, SYNA, to name just a few). UBNT is even somewhat in the same field, will benefit from the same build out, and was mentioned favorably in one of the articles. “There are also other upstarts in the microwave backhaul market which have very promising long-term prospects, for example Ubiquiti Networks”.

So why would you take the risk of a total wipe-out? Just wondering.

Saul

4 Likes

Hi Saul,

Thanks for your reply to my post about DragonWave. I have modeled my portfolio after yours and therefore own PFIE, AIOCF, UBNT and SYNA in approximately the same percentages as you do.

I became interested in DragonWave two years ago when it appeared in Chris Umiastowski’s “Growth Portfolio” that is featured in the Toronto Globe and Mail. The second link I provided in my previous post takes you to one of his articles. He is a tech savy financial writer who introduced me to growth orientated and technology based investing.

My interest in DragonWave is based on the assessment that it has an excellent product and that it has the possibility of increasing rapidly in value. I have been preoccupied with the growth potential of the company. It traded a few years ago at around 14 dollars and is now at approximately 2.00 dollars. It likely will be a multi-bagger if things work out as I suspect they will. However this may all be a figment of my imagination. Your reply has had a sobering effect on my enthusiasm to say the least and I am grateful for that. I haven’t been looking hard enough at the risk. It is difficult to know how high it is but I see that you think it is significant. I did take a large position in the company recently (approx 8%). Perhaps that was a mistake.

Saul! Thank you for taking the time to read the articles and give me your feelings about the company. I very much appreciate it.

1 Like

Your reply has had a sobering effect on my enthusiasm to say the least and I am grateful for that. I haven’t been looking hard enough at the risk. It is difficult to know how high it is but I see that you think it is significant. I did take a large position in the company recently (approx 8%). Perhaps that was a mistake.

Hi Cleverbear, Please don’t misunderstand me. I didn’t do any kind of in-depth analysis of the company. All I did was read your post and the two articles you linked me to. You yourself wrote The company is perched precariously between bankruptcy and strong growth. and both articles echoed that sentiment. It’s like the company has been in an uncontrolled nose dive, and the question is whether the pilot can pull it out before it crashes into the sea. He may succeed and it may pull up again into the sky, but I wouldn’t want to risk 8% of my capital on a risk like that.

Cleverbear, look at this. This is from their last quarter report:

Revenue for the fourth quarter of fiscal year 2014 was $17.9 million, compared with $22.2 million in the third quarter and $28.3 million a year ago.

Revenue down a bunch, sequentially and year over year!

Net loss … was $11.6 million or ($0.20) per share. This compares to a net loss of $5.5 million or ($0.12) per share in the third quarter and a net loss of $27.2 million or ($0.71) per share a year ago. .

They are cutting their Net Loss by cutting expenses, but the losses are still enormous. This is a loss of roughly $12 million on $18 million of revenue. To make it clear what that implies, it means they took in 18 and spent 30!

They say they expect revenue up 50% next quarter over the March quarter. That means their revenue would be $9 million more. You might think that $9 million more revenue would get them out of danger. However: Gross margin …was 14.5%, compared with 11.1% in the third quarter of this fiscal year and 5.3% a year ago.

Gross margin is subtracting cost of goods sold. If they keep a Gross Margin of 14.5% they will keep about $1.35 million out of that $9 million increased revenue, and “only” lose about $10.2 million instead of $11.6. If they get Gross Margins up to 20% on increased volume, they will keep $1.8 million out of the $9 million increased revenue — and lose “only” $9.8 million instead of $11.6 million.

And this is assuming that they will have 50% more revenue with NO increase in operating expenses (no increase in salesmen, secretaries, telephones, etc. Any increase in operating expenses to cover the increase in revenues will increase their losses.

And this is a company that had only $19 million in cash. Losing “only” $10 million a quarter, not a year.

Revenue for the full fiscal year 2014 was $90.0 million, compared with $123.9 million for the prior fiscal year. Net loss for the full fiscal year 2014 was $34.2 million or ($0.83) per share, compared with a net loss of $54.7 million or ($1.46) per basic and diluted share in the prior fiscal year.

My goodness, there are more attractive opportunities around!

Saul

7 Likes

Hi Saul,

I hear what you are saying loud and clear. I am beginning to feel like the guy who stumbles out of his apartment in the morning to go to work and realizes after walking a few blocks that he forgot to get dressed!

I think what I was doing was assuming that all expenses were deducted from total revenue whereas what is really happening is that their expenses are coming off of what is left after deducting the costs of goods and services. Looks like I need to learn how to read financial reports!

Thanks again for your help with this. I wasn’t expecting you to reply to my posts and especially not in this detail. It is very kind of you to do so. I am out of this company as of Monday morning by the way!

All the best!
Sheepish bear

6 Likes

If you want to keep your toe in the water, keep a ½% or 1% position. Then you can feel good if it goes up, but in won’t take out a big chunk if it crashes.

Saul

1 Like

Sorry to belabor this, but I looked back at the quarterly report just to make sure that most of the loss wasn’t some non-cash nonsense. First thing I saw was that the number of shares at the end of the quarter were 58 million compared to 38 million a year ago. That’s how fast they are diluting(!) to try to keep their heads above water.

Then

Revenue $17.9 million
Less Cost of Sales $15.3 million

Gross Profit $2.6 million

All they had left out of their $17.9 million sales was $2.6 million.

Then listed under expenses:
R&D $4.9 million
Selling and Marketing $3.2 million
General and Administr. $3.8 million

Total Operating Expenses $11.8 million (rounded).

Then throw in a couple of “other expenses” that are pretty certainly cash like Interest, Foreign Exchange Losses and Income Tax and your total cash expenses are about $12.7 million, so they have a Cash loss of at least $10 million.

For this particular quarter, if they had kept their same Gross Margin, they would have needed $70 million MORE revenue to break even, or a total of $87.9 million in revenue. And that’s just breaking even — ASSUMING NO ADDITIONAL OPERATING EXPENSES IN SPITE OF MORE THAN 4 TIMES THE REVENUE!!!

That’s a heck of a big hole to dig yourself out of.

Saul

5 Likes

One could say that the dragon is burning cash.:slight_smile:

Wayne

3 Likes

Great post, Saul.

If one were so predisposed, it would be tempting to short this dragon.

Jim

If one were so predisposed, it would be tempting to short this dragon.

Don’t do it Jim. Just because they are still losing lots of money doesn’t mean they might not go up on good news. Shorting means potential unlimited losses for you. I wouldn’t ever short anything. Look at Citron, who shorted Zillow at $40 and it’s now at $140.

Saul

For FAQ’s and Knowledgebase
please go to Post #2176

1 Like

If one were so predisposed, it would be tempting to short this dragon.

Don’t do it Jim. Just because they are still losing lots of money doesn’t mean they might not go up on good news. Shorting means potential unlimited losses for you. I wouldn’t ever short anything. Look at Citron, who shorted Zillow at $40 and it’s now at $140.

Saul is soooooo right. First, I would never short anything in a rising market. Odds are too high the price of the company will keep rising. Second, the only type of company I’d short would be one that is about to die…think Circuit City or JC Penny.

Keynes said,“the market can stay irrational longer than you canstay solvent.”

Jeb

3 Likes

I am not recommending this, but you could buy ( to open )puts ( you pay upfront) and, if correct, you can sell ( to close) for a profit at a lower price. Your risk is less, namely the cost of buying the puts. Bear in mind if the stock does not fall below the strike price plus your costs upfront, you will have lost some money. I agree that the market psychology seems to be to the upside, so not a good time to short. Good puts to buy are stocks that run up without sufficient fundamentals. Example, DDD, was a short by one of the leading short sellers when the stock had run up several months ago. Buying puts then was a good move— not that I did it. Best of luck with your decision.

Andy

Great advice, Saul!

Shorting is a loser’s game precisely because of your warning that one could lose unlimited amounts of money. I’ve never shorted a stock.

Thanks for the great reminder for us all.

Jim

One could say that the dragon is burning cash.:slight_smile:

Wayne

How else would a dragon generate fiery breath?

:slight_smile: