Ruckus Wireless Inc (RKUS), Aruba Networks, Inc. (ARUN): This Wi-Fi Solutions Provider Is Too Hot to Touch

Ruckus Wireless Inc (NYSE:RKUS)On May 6, Ruckus Wireless Inc (NYSE:RKUS) experienced a significant decline of as much as 17.4% to $15.70 per share in after hours trading after it reported sluggish results. Ruckus Wireless investors might not be happy, as the company has dropped more than 32% since the beginning of the year.

Interestingly, several famous institutions are big Ruckus Wireless Inc (NYSE:RKUS) shareholders, including Sequoia Capital and Google. While Sequoia holds 5.5 million shares, accounting for 7.48% of the total shares outstanding, Google owns nearly 4 million shares, representing a 5.4 % stake in the company. Let’s take a closer look to see whether or not investors should consider the recent plunge as a buying opportunity.

Rapid growth

Ruckus Wireless Inc (NYSE:RKUS) is a leader in carrier-class Wi-Fi solutions with several products, including gateways, access points, and controllers to more than 21,700 customers around the world. Most of its revenue, $201.9 million, or 94% of total 2012 revenue, was generated from product sales, while service sales contributed only $12.7 million in revenue in 2012. In terms of geography, Ruckus Wireless derived the majority of its revenue, $91.6 million, from the U.S. Japan ranked second with nearly $27.5 million in revenue in 2012.

In the past three years, Ruckus Wireless Inc (NYSE:RKUS) has witnessed rapid growth in both top and bottom lines. Revenue increased from $75 million in 2010 to $215 million in 2012, while net income rose from $(4) million to $32 million during the same period. Ruckus Wireless is a cash cow. In 2012, the company generated $28 million in operating cash flow and $21 million in free cash flow. Ruckus Wireless employs no debt in its operations. As of December 2012, it had $170 million in equity, $133 million in cash, and no debt.

Sluggish first-quarter earnings

In the quarter, its revenue was $57.2 million, 27% higher than last year. However, net income came in at only $314,000, much lower than the net income of $3.75 million in Q1 2012. Its non-GAAP EPS came in at $0.03, below analysts’ estimates of $0.04 per share. The lower net income was due to significant increase in operating expenses including R&D, sales & marketing as well as general and administrative.

Aruba Networks, Inc. (NASDAQ:ARUN) is also expensively valued

At $15.70 per share, Ruckus Wireless Inc (NYSE:RKUS) is worth $1.32 billion on the market. It seems that the company is quite expensively valued at as much as 48 times EV/EBITDA. Interestingly, compared to its peer Aruba Networks, Inc. (NASDAQ:ARUN), Ruckus Wireless has a similar valuation. Aruba Networks is trading at $22 per share, with a total market cap of $2.5 billion. The market values Aruba Networks, Inc. (NASDAQ:ARUN) at as high as 50.5 times EV/EBITDA.

Aruba Networks, Inc. (NASDAQ:ARUN) is the leader of network access solutions for mobile enterprise networks to more than 20,000 customers worldwide. Recently, the company introduced its WorkSpace partner program, which has more than 40 mobile applications already being integrated. According to the company, Aruba WorkSpace’s core strategy was to develop and support mobile application ecosystems.

Peter Cellarius, Business Development and Partnerships VP of Aruba Networks, Inc. (NASDAQ:ARUN) said: “We’re pleased to see such a positive response from the mobile application community, with 40+ applications integrated at launch – and growing quickly. These application vendors recognize the importance of giving enterprises the right tools to securely and efficiently manage corporate applications and data that reside on employees’ mobile devices.”

Ericsson has a more reasonable valuation

Ericsson (ADR) (NASDAQ:ERIC) is much cheaper than the other two companies. The company has a much more diversified business than both Ruckus Wireless and Aruba Networks. Ericsson (ADR) (NASDAQ:ERIC) has three main business areas: Networks, Global Services, and Support Solutions, serving customers in more than 180 countries worldwide.

The Networks segment contributed the majority of sales, SEK 117.2 ($17.89) billion, or nearly 51.5% of the total revenue. It is also a big operating profit contributor, with more than SEK 7 billion ($1.07) in operating income in 2012. Recently, the company decided to divest its power cable business to NKT Cables for around SEK 250 ($38.17) million. The company estimated that this divestment transaction would create a loss of SEK 100 ($15.27) million and affect negatively its 2013 third-quarter earnings results, especially the Networks segment. Ericsson is trading at $12.30 per share on the market, with a total market cap of $39.7 billion. The market values the company quite reasonably at 8.15 times EV/EBITDA.

My Foolish take

With an extremely high valuation, Ruckus Wireless Inc (NYSE:RKUS) offers investors nearly no margin of safety. Consequently, a small glitch in its business might cause the significant drop in its stock price. I expect Ruckus Wireless’ valuation to contract further in the near future. The same applies for Aruba Networks, Inc. (NASDAQ:ARUN). Personally, I would consider both companies to be too hot to touch. Ericsson (ADR) (NASDAQ:ERIC), with its global presence, more diversified business segment and reasonable valuation, would be a much better pick among the three.

The article This Wi-Fi Solutions Provider Is Too Hot to Touch originally appeared on and is written by Anh Hoang.

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