Why Nokia, Alcatel-Lucent Deal Could Be A 'Game Changer' For DragonWave

In a report published Wednesday, H.C. WAINWRIGHT & CO. analyst Kevin Dede argued that

Nokia CorporationNOK

"swallowing"

Alcatel Lucent SA

ALU

could be a "game changer" for

DragonWave, Inc.DRWI

Dede noted that Nokia's $2.2 billion purchase of Siemen's telecom networking business resulted in Nokia selling its microwave division at the end of 2012 to DragonWave. The analyst added that Alcatel-Lucent hasn't made any "amazing" breakthroughs in the microwave industry and has relied on its "expensive" and "clunky-ness" internally developed systems. "Based on our independent, though cursory understanding, we imagine that the combined companies might continue to involve DragonWave in Nokia projects most certainly (given the two companies are tied at the hip on microwave), and invite DragonWave to contend in those projects that were previously exclusively Alcatel's," Dede wrote. "This could be a win for DragonWave once the dust settles." Dede did however caution that in the meantime the merger could be cause for uncertainty from investors' perspective as the stock has not reacted much over the past couple of trading sessions.

Analyst Rating
According to Dede, DragonWave shares are undervalued as they are trading at about 0.2x EV-to-sales on his fiscal 2016 estimates of $182 million. The analyst added that investors have become willing to pay multiples as high as 2-4x EV-to-sales, and this is a "distinct possibility" should his 2016 sales growth assumption of 15 percent prove conservative. Naturally, DragonWave is subject to the risks small capitalization equipment companies face in addressing large markets and the company relies on approximately 50 percent of its ales from Nokia – indicating customer concentration issues. Shares are Buy rated with a $1.50 price target.

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