Shares of communications technology company Casa Systems (CASA) exploded 82% higher on Monday after telecom giant Verizon (VZ) announced it had awarded Casa a “multi-year purchase contract” for “5G Core Network Functions” — and that Verizon would spend $40 million to acquire a 9.9% stake in Casa Systems stock.
Why is this significant for Casa? Raymond James analyst Simon Leopold explains:
“Up until now [Casa] has not had material traction with North American wireless operators,” but this new deal with Verizon “is certainly a positive momentum builder.” Having received Verizon’s stamp of approval for its technology, this deal could open up “other potential opportunities with other Tier 1 North American carriers” for Casa, lifting the company into the ranks of “legacy incumbent vendors” such as Cisco, Ericsson, and Nokia. That’s the long-term thesis.
More immediately, too, the news also seems very good for Casa. Verizon’s announcement has two main components. Firstly, Casa will receive about $60 million from Verizon — $40 million for its stock, and a further $20 million “development fee,” says Leopold, “that will be paid to Casa over the course of 2Q22-3Q22.”
Meanwhile, the multi-year contract for Casa to provide Verizon with “Core” solutions — essentially, a software licensing deal, notes Leopold — could be worth up to $120 million to Casa over a term of years. $120 million is about 30% of Casa’s annual revenues currently, and all coming from a single customer.
And yet, Leopold still has reservations about Casa. For one thing, the new Verizon revenues might begin rolling in as early as next year — but they also might not. As the analyst points out, these revenues are “not guaranteed and subject to a number of executables by Casa and the acceptance of deliverables from Verizon.” And in any case, Casa made it pretty clear that it will see neither top nor bottom line benefit from the Core solutions contract in 2022.
Additionally, “the duration/length of the agreement was also unclear, making it hard to quantify the potential annual revenue contribution.” Were all $120 million to arrive in a single year, certainly, the 30% boost to sales would be a big reason to Casa investors to cheer. But if the $120 million is spread across, say, a decade, well, that would grow Casa’s revenue stream by a whole lot less (about 3% annually).
Leopold further notes that it’s not clear how Verizon’s $20 million “development fee” will affect Casa’s earnings. It might add $0.18 per share to Casa’s net income — but depending on how it’s classified, it also might not.
Long story short: for the time being Leopold says he’s going to reserve judgment on precisely how big of a deal all this news is for Casa — at least until management gives some more details in its Q1 2022 earnings call on May 5. In the meantime, he’s sticking with his Market Perform (i.e. Hold) rating on Casa stock. (To watch Leopold’s track record, click here)
Overall, however, Leopold is among a minority on Wall Street. Of the 4 current analyst reviews, 3 say Buy, coalescing to a Strong Buy consensus rating. The average price target stands at $9, providing the shares with room for another 33% growth in the year ahead. (See CASA stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
