Shares of Ribbon Communications (RBBN -1.25%) skyrocketed on Wednesday. The single-day gains peaked at 32.7% in the early afternoon before settling down to a still-impressive 28% price increase at 2:30 p.m. ET today.
The provider of hardware and software solutions for secure communication networks reported modest earnings on Tuesday evening, but also unveiled an impressive contract with Verizon Communications (VZ -0.10%) amid generally improving market trends.
A big Verizon deal helped investors forgive weak quarterly results
Ribbon's results fell short of analyst expectations in the first quarter of 2024. Yes, that's an unusual setup for a huge stock-price jump.
Your average analyst had expected the small-cap company to report break-even earnings on sales near $185 million. In reality, the adjusted bottom-line loss narrowed from $0.02 per diluted share in the year-ago period to $0.01 in the most recent quarter. Revenue fell 3.5% year over year to $180 million.
So the financial results weren't impressive, but Ribbon had other tricks up its sleeve.
First and foremost, it also announced a multiyear contract with Verizon. The company will help the telecom replace outdated call-routing and networking systems with Ribbon's cloud-based solutions. This network modernization should add $300 million to Ribbon's sales over the next three years -- a major boost for a company with annual revenue of less than $820 million.
Furthermore, CEO Bruce McClelland outlined several signs of an improving market environment. On the earnings call, McClelland said: "With our new Verizon program and the potential for similar engagements with other customers, we believe we've reached a low point and expect solid recovery in the business. We expect the new Verizon program alone to underpin this business for the next several years."
Ribbon's stock looks undervalued right now
This strategic deal with Verizon could be a pivotal shift. This expanded partnership (Verizon has been a Ribbon client for years) could serve as the foundation for Ribbon's future growth, setting the stage for further industry partnerships. A $300 million network upgrade with one of the largest telecoms in America should serve as a solid selling point in other contract talks.
For investors, the significant boost in projected revenue from this deal looks like a buying signal, suggesting that Ribbon's stock might be undervalued. Shares trade at 0.7 times sales and 8.8 times forward earnings projections today, and those numbers are quite low for a tech stock with robust growth potential. In other words, Ribbon could be a good buy today even after Wednesday's sudden price jump.
