Why DASAN Zhone Stock Can Double and Still Not Be Overvalued

Why DASAN Zhone Stock Can Double and Still Not Be Overvalued
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DASAN Zhone Solutions: A Classic Case of Growth at a Reasonable Price

In my search for cheap micro-cap technology growth stocks that trade at attractive prices, DASAN Zhone Solutions Inc (NASDAQ:DZSI) surfaced on my screens.

Valued at only $179.8 million at the time of this writing, DASAN Zhone provides customizable networking hardware and software to a client list that includes over 1,000 service providers and enterprise networks spread across more than 50 countries.

The solutions offered by the company include broadband access, Ethernet switching, Passive Optical LAN, and software-defined networks.

For a small company, the growth and valuation are attractive, yet DZSI stock has not been rewarded by Mr. Market. The stock is down 23% this year and is currently just north of its 52-week low.

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For aggressive traders, DASAN Zhone stock could provide big returns if the company can deliver on its earnings estimates.

A look at its one-year stock chart shows DASAN looking to break above a key resistance level around $10.80 and take a run at its previous $12.00–$15.00 sideways channel, which was seen between October 2018 and February 2019.

Chart courtesy of StockCharts.com

A move back to the band could imply a return of 50%. The downside risk is $9.00, resulting in a good risk-to-reward trade.

My Bullish Fundamental Case for DZSI Stock

While DASAN Zhone is small, the company’s ability to grow its revenue is impressive.

As the below table shows, from 2014 to 2018, DASAN’s revenue more than doubled, increasing its revenue in four straight years.

Fiscal Year Revenue (Millions) Growth
2014 $120.6 -1.3%
2015 $139.2 15.4%
2016 $150.3 8%
2017 $247.1 64.4%
2018 $282.4 14.3%

(Source: “DASAN Zhone Solutions Inc.,” MarketWatch, last accessed April 26, 2019.)

At the time of this writing, DZSI stock was trading at an attractive 0.63 times its revenue in 2018.

Looking ahead to 2019, DASAN Zhone is estimated to ramp up its revenue by a stellar 25.4% to $354.1 million. (Source: “DASAN Zhone Solutions, Inc. (DZSI),” Yahoo! Finance, last accessed April 26, 2019.)

In 2017 and 2018, DASAN Zhone produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA) that saw triple-digit growth.

Fiscal Year EBITDA (Millions) Growth
2014 -$3.6
2015 -$1.6 56.2%
2016 -$10.2 -547.2%
2017 $4.5 144.6%
2018 $9.9 117.7%

(Source: MarketWatch, op cit.)

DASAN needs consistency in its earnings picture, but it reported generally accepted accounting principles (GAAP) profits and growth of 105% in 2017 and 153% in 2018.

Fiscal Year GAAP Diluted Earnings Per Share
2014 -$0.65
2015 -$0.36
2016 -$1.32
2017 $0.07
2018 $0.17

(Source: Ibid.)

DZSI is expected to report an adjusted $0.62 per diluted share in 2019, up from $0.49 in 2018, and follow that with a surge to $1.06 per diluted share in 2020. (Source Yahoo! Finance, op cit.)

The company was free-cash-flow-positive in three of the past five years, which is impressive for a small company. DASAN Zhone had a hiccup in 2018, but it’s not a concern.

Fiscal Year Free Cash Flow (Millions)
2014 -$4.3
2015 $3.5
2016 $2.3
2017 $0.8
2018 -$13.4

(Source: MarketWatch, op cit.)

Analyst Take

The growth in DASAN Zhone stock is impressive, especially if you consider that it’s only a micro-cap stock.

Valuation-wise, the stock trades at an attractive 10.17 times its consensus 2020 earnings per share and it has a price/earnings-to-growth ratio of only 0.84, meaning DASAN Zhone trades at a discount to its expected forward earnings growth.

Even if DZSI stock were to double in price, the valuation would still not be that out of line, given its projected growth.