DZS Inc: Overlooked 5G Stock Up 96% YOY but Still Undervalued

DZS stock

DZS Stock Trading at Highest Level in 7 Years

DZS Inc (NASDAQ:DZSI), formerly DASAN Zhone Solutions Inc, is a wonderful, small-cap 5G stock that has had excellent momentum since bottoming in March 2020.

As of this writing, DZSI stock is up by:

  • 40% over the last three months
  • 21% over the last six months
  • 26% year-to-date
  • 96% year-over-year
  • 548% since bottoming in March 2020

Wall Street thinks this provider of 5G networking hardware has room to run over the coming quarters.

Of the analysts providing a 12-month share-price forecast for DZS stock, their average target is $25.00, with a high estimate of $26.00. That suggests potential upside of 29% and 38%, respectively.

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Why the enthusiasm for DZSI stock?

In addition to a strong 2020, DZS Inc had a great start to 2021, with record orders and its highest-ever backlog: $106.0 million. The company also raised its full-year guidance.

To help bolster its balance sheet and position itself for strategic investments, DZS recently raised $64.4 million in gross proceeds, which it will use to pay down $41.8 million in short- and long-term debt and make a series of strategic acquisitions.

In the first quarter of 2021, DZS Inc acquired two technology companies (Optelian and RIFT). The acquisitions are part of the company’s broader growth plan to expand its product portfolio, increase its gross margins, and create opportunities in the Americas, Europe, Middle East, Africa (EMEA), and Asia.

Also during the first quarter, the company launched new products and added 24 new customers.

DZSI Stock Overview

DSZ provides ultra-broadband network access solutions and communications platforms deployed by advanced Tier-1, Tier-2, and Tier-3 service providers and enterprise customers. (Source: “DZS Investor Presentation: June 2021,” DZS Inc, last accessed July 23, 201.)

The company offers mobile transport products, including standard Ethernet/IP or multiprotocol label-switching interfaces, to mobile operators that enable them to upgrade their mobile fronthaul/backhaul systems and migrate to 5G and beyond.

DZS Inc’s more than 20 million products are deployed by more than 1,200 customers in more than 120 countries worldwide.

The company’s list of clients is a who’s who of the tech world, including AT&T Inc. (NYSE:T), Lumen Technologies Inc (NYSE:LUMN), and Telus Corporation (NYSE:TU).

Interestingly, the current security environment is creating a beneficial investment cycle for DZS Inc.

Chinese suppliers represent approximately 63% of the global market, but that number is expected to shrink. That’s because the U.S., Japan, Australia, U.K., and India have banned Chinese tech suppliers. More than a dozen other countries are thinking of doing the same.

Excellent Start to 2021

Building on a strong second half of 2020, DZS delivered revenue of $81.0 million in the first quarter of 2021, up by 70.7% year-over-year and exceeding the high end of its internal guidance of $70.0 to $75.0 million. (Source: “Q1 2021 Shareholder Report,” DZS Inc, last accessed July 23, 2021.)

Geographically, the Americas were responsible for 24.9% of the company’s revenue, with EMEA delivering 2.1% of its revenue and Asia delivering a whopping 53.0%.

DZS Inc’s fixed broadband connectivity portfolio was responsible for 71.9% of its revenue and its mobile solutions portfolio was responsible for 28.1%. The growth in mobile revenue was exceptional during the first quarter: 635% year-over-year to $22.8 million.

The company reported a first-quarter net loss of $23.2 million ($0.092 loss per share), versus a first-quarter 2020 net loss of $8.8 million ($0.41 loss per share) and a fourth-quarter 2020 net loss of $14.0 million ($0.65 loss per share).

DZS Inc’s adjusted net income in the quarter was $2.5 million ($0.10 per share), compared to a first-quarter 2020 adjusted net loss of $5.4 million ($0.25 loss per share) and a fourth-quarter 2020 adjusted net loss of $1.2 million ($0.06 loss per share).

The company finished the first quarter with cash, cash equivalents, and restricted cash of $63.7 million, compared to $54.4 million at the end of the fourth quarter of 2020.

DZS Inc Raises Full-Year Guidance

DZS entered the second quarter with a significantly strengthened balance sheet, the best sales pipeline in its history, a record backlog of $106.0 million, 12 of the world’s top 25 Tier-1 wireless and wireline service providers as customers, and a path to higher margins.

For the second quarter of 2021, DZS Inc expects to report revenue in the range of $76.0 to $80 million and adjusted earnings in the range of a loss of $3.0 million to positive $2.0 million.

For fiscal 2021, DZS expects to report net revenue in the range of $320.0 to $340.0 million, up from its previous guidance of $310.0 to $330.0. The company also expects to report adjusted earnings in the range of $2.0 to $20.0 million, compared to a previous guidance range of $1.4 to $17.0 million.

Analyst Take

DZS stock is an excellent, overlooked 5G stock with tremendous long-term growth potential.

While DZS Inc already had a large global footprint, two recent acquisitions increased its total addressable market by a compound annual growth rate (CAGR) of 9.3% to over $97.0 billion.

On top of that, an increasing number of countries formally banning Chinese original equipment manufacturers (OEMs), the rise of 5G networks, and government-sponsored broadband initiatives are helping drive favorable conditions for DZSI stock over the near and long terms.