Polar Power’s stock is thin and quite volatile. Lately it has been trading higher. This is not the first time it’s made a strong move up from a base around $4.50 per share. Last time, however, it got waxed by yet another earnings disappointment. The recent move has shown a consistent bid, creating a decent up trend. Will this move be different? Or, will POLA miss earnings again, sending shares back to new lows?
The history of POLA
For those who don’t know the story, here’s POLA’s history as a public company in a nutshell. The Company went public late in 2016 at a valuation based on solid earnings and strong growth. It was a fair valuation and traded well out of the gate until one customer’s business slowed. Unfortunately, that customer, a big one in Verizon, represented over 90% of POLA’s business and the stock got slammed.
Since then, the Company has discussed potential new customers, the return of Verizon, international business, etc. They have a lot of irons in the fire and, basically, when business at POLA is rocking, they throw off cash It does appear that the Company’s products are unique enough to be in demand when large carriers decide to spend on infrastructure. Sadly, these spends are difficult to predict and, with networks not in the growth heyday of the last few decades, not a total business necessity but more optional in any given year.
As a result, Polar Power has become a great value trade. The shares sit at a valuation that gives investors great upside if/when business starts to ramp back up, while offering a real floor underneath as they are priced for minimal near-term sales or profits.
What to expect going forward?
As POLA continues to drift upwards, hitting $5.10 this morning as I write this, the question becomes is this a head fake again, or is Polar Power’s business about to ramp up?
In an attempt to answer this question, let’s look at all the possible drivers of strength.
1. Verizon…the Company has been very true to the mantra that VZ’s business will return, however it gets continually pushed back and appears to have become quite price sensitive. Not exactly music to an investor’s ears. I don’t think this is returning to prior levels anytime soon, if ever. It should, however, begin to pick up. I would expect VZ business to be higher in Q3 than the last two quarters, which is a good start.
2. AT&T…this business is definitely happening in the near future and is probably starting to show life in Q3. We know AT&T generally wants to do business with POLA. But, more importantly in the near term, we know that the FirstNet rollout is happening. This has taken on only increased urgency on the back of recent natural disasters. I expect business with AT&T to start in Q3 and ramp nicely going forward, with really significant revenues appearing in Q1 of next year.
3. T-Mobile…a true wild card. These guys are the cheapest of major telecoms, spending as little as possible every step of the way. This certainly includes backup power systems. However, they do have 60,000 towers and are reconfiguring backup power systems in 20% per year, which is a huge opportunity. They are also not happy with their current vendor, Delta Electronics (you get what you pay for, duh!). I expect to see Polar win an RFP for over 1,000 units sometime soon. I also think the margins will stink. Could they have won one already? That’s possible and might be driving the stock. Time will tell.
4. International business. Polar is seeing RFPs for projects overseas continually and this is ramping. Business from this will be in 2018, most likely, however and, like T-Mobile, it’s not going to be super high margin. I don’t think anything international is causing someone to be buying POLA right now.
The bottom line?
Polar’s stock is acting great, but this will only continue when investors are confident that business is picking up enough to put a great E in the P/E ratio. It is unlikely that a pickup in Verizon or international business is driving the stock up.
More likely in my opinion, FirstNet is driving AT&T business, giving the Company some visibility into future earnings. It’s also possible that T-Mobile has stepped up with a big order.
As shares in POLA rally, investors who own the stock have to ask themselves, “Is it for real this time?” The odds are that Polar Power is going to see much bigger revenues in 2018 based on all the possible components for future revenue. It is truly possible that we are going to start getting visibility into this ramp in Q3, but much more likely that it happens in Q4. However, based on the fact that it’s going to happen (in my opinion), the Q3 revenues are not going to be as important as increasing confidence in Q4 and beyond.
Markets are, by definition, a discounting mechanism. However, small cap stocks, especially ones that have disappointed recently, tend to be more “show me” situations. My guess is that POLA’s Q3 numbers are going to be unimpressive, but guidance will be strong. The stock will likely act okay on this, but the big move will be when investors get truly comfortable with 2018 being a $30M or more revenue number. Which is quite possible, by the way.
Thus, I’m neither a seller here, nor an aggressive buyer. The value is real, the future is bright, the near term is uncertain and I will continue to pick up on dips, but not chase.