Expect Allot Comm to Trade Sideways

Allot Communications Ltd. (ALLT - Analyst Report) reported weak fourth quarter results that were below our revenue and earnings expectations. The company reported an operating loss for the fourth straight quarter on lower revenues and higher than expected R&D costs related to the development of its new service gateway platform. While the company rebounded to growth in the Americas, it continued to slip on reduced deliveries to tier II operators due to misinterpretation of their demand.

Shares of Allot Communications are currently trading much below its IPO price of $12 per share, but we believe shares are fairly-valued at these levels given the risks involved with the company at this time. The company is selling at 59.4x our 2008 earnings per share estimate of $0.05 per share, or 1.7x our fiscal 2008 sales estimate. We expect the company to report close to break-even results for the fourth quarter of 2008.

We expect the stock to continue to trade sideways until there is more good news from its newest Service gateway product, and the current uncertain market has little tolerance for risk. The company has over $1.61 a share in cash at the end of the fourth quarter, eroded further due to reclassification of short-term investments.

So we doubt there is much upside to the current stock price, which is why we are maintaining our Hold rating at this time. We have lowered our revenue and earnings estimate for 2008 and fixed our target price at $3.10 per share based on the company selling at 1.73x our 2008 sales estimate at this time, until we have better visibility into 2008.

Read the full analyst report on ALLT.