On Dec 25, 2014, Zacks Investment Research downgraded Sonic Foundry, Inc. (SOFO) to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.
Most of the estimates have been moving downward since the company reported tepid fourth quarter 2014 results on Dec 11.
Why the Downgrade?
The company reported fourth-quarter 2014 loss per share of 30 cents. The quarter’s loss also widened year over year, primarily due to higher operating expenses. Although revenues were up significantly (25%) year over year, it lagged the Zacks Consensus Estimate.
Moreover, gross margins during the quarter came in at 69.4% compared with 72.1% in the year-ago quarter. Margins were impacted by lower product gross margins. Sonic Foundry’s non-GAAP operating expenses as a percentage of revenues increased from 80.9% to 84.7% year over year, which impacted operating performance.
The company used 87K of cash in operations during the quarter. The company had long-term unearned revenues of $929K on its balance sheet while long-term notes payable to bank stood at $1.14 million.
A tepid performance in fourth-quarter 2014 resulted in downward revisions in earnings estimates for Sonic Foundry. Over the last 30 days, the Zacks Consensus Estimate declined a massive 67.6% to 23 cents per share for 2015.
Last quarter, the company posted a negative earnings surprise of 350%. Moreover, from a valuation perspective, the stock does not look very attractive as it currently trades significantly higher than the S&P based on a forward earnings estimate. This indicates a downward risk. Sonic Foundry currently trades at a forward P/E of 34.47x as against the S&P average of 17.80x.
Furthermore, competition from Cisco (CSCO) and Microsoft (MSFT) also remains a concern.
Stocks to Consider
Not all technology stocks are performing as poorly as Sonic Foundry. We recommend Micron Technology (MU) and Avago Technologies Ltd. (AVGO), both of which sport a Zacks Rank #1 (Strong Buy).
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