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Network Engines: Revving up or Out of Gas?

  • April 6, 2006

A subscriber recently asked me if I was familiar with a company called Network Engines (NENG). I had not heard of this company before and so I looked it up. Network Engines is a technology company that was founded in 1997 at the height of the internet bubble and raised $117 million through its initial public offering in 2000. It’s primary line of business allows software application providers to deliver their applications as network appliances. A recent prominent product is a hardware security appliance tailored specifically to Microsoft exchange servers. With the increased deployment of exchange servers across corporations as evidenced by the numerous BlackBerrys in use these days, Network Engines could see some rapid growth.

The latest quarterly results confirm this fact as Network Engines narrowed its losses in the last quarter and increased revenue. However this good news appears to be already factored into the stock price as the stock has doubled in less than 3 months. Since stock price is often driven by future earnings expectations and since they clearly mentioned in their earnings release that they will post a loss next quarter, I do not see additional price appreciation in the near future. The company has been unprofitable during the last three years losing over $15 million in 2005. Given that this is a micro-cap stock with a market cap of just $113.9 million and a stock price of $3, it is entirely possible that momentum investors could take the stock higher in the short-term. Instead of starting a position, I plan to keep Network Engines on my watch list to see if the company can turn itself around and become profitable or at least start heading down that road.

Update: For a positive view of Network Engines (NENG), check out the following two articles by Yehuda Fruchter of Casino Capitalism