The stock of AudioCodes (NAS:AUDC, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $33.59 per share and the market cap of $1.1 billion, AudioCodes stock is believed to be significantly overvalued. GF Value for AudioCodes is shown in the chart below.
Because AudioCodes is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 11.2% over the past five years.
Link: These companies may deliever higher future returns at reduced risk.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. AudioCodes has a cash-to-debt ratio of 4.31, which ranks better than 68% of the companies in Hardware industry. Based on this, GuruFocus ranks AudioCodes’s financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of AudioCodes over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. AudioCodes has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $227.6 million and earnings of $0.94 a share. Its operating margin is 18.59%, which ranks better than 91% of the companies in Hardware industry. Overall, the profitability of AudioCodes is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of AudioCodes over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. AudioCodes’s 3-year average revenue growth rate is better than 79% of the companies in Hardware industry. AudioCodes’s 3-year average EBITDA growth rate is 46.2%, which ranks better than 91% of the companies in Hardware industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, AudioCodes’s ROIC is 14.95 while its WACC came in at 6.98. The historical ROIC vs WACC comparison of AudioCodes is shown below:
Overall, AudioCodes (NAS:AUDC, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 91% of the companies in Hardware industry. To learn more about AudioCodes stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
