Why is Avigilon's Stock Falling Like a Knife?

By John Honovich, Published Oct 08, 2014, 12:00am EDT

A week ago, a prominent Avigilon investor admitted, "Nobody wants to hold [Avigilon stock]. Everybody wants to sell it." He then recommended buying it.

He evidently was right, at least partially.

In the past week, Avigilon's stock has dropped another 20% and is now down nearly 60% from its high earlier this year.

Avigilon's market valuation is down over $900 million since then.

[Update October 10th - Avigilon stock ended the week at a new low: $13.90 per share.]

From speaking to investors and analysts covering Avigilon, here are the main reasons they are offering for the fall:

  • Lack of confidence in CEO
  • Issues with management team
  • Problems in hiring / scaling
  • Low cost competition increasing
  • Competitor products catching up
  • Accounting irregularities
  • Growth rate sharp decline

Inside, we provide our analysis on how accurate we believe each reason is.

CEO Confidence

The #1 tangible CEO criticism is the CFO 'resignation'. It was clearly handled poorly. The sick excuse bizarrely transformed into a criticism of his own employees as being greedy and the 'sick' CFO immediately took a new job.

The bigger problem appears to be a vicious cycle, where each stock price drop is further validation that the CEO is doing a bad job. This is ironic because investors loved him a year ago when the stock price was shooting upwards.

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Whether it is fair or not, it is certainly playing a compounding role.

Management Team

The CFO 'resignation' was one of many management exits in the past year, including the VP of Marketing, the VP of HR, the VP of Operations and 2 finance directors.

Related, Avigilon employee reviews show a repeated distrust and disappointment in Avigilon's management team.

Avigilon is still searching for a replacement CFO, which is a concern we are hearing from investors.

Hiring / Scaling

Employee expansion was low, for Avigilon's standards and growth needs, in Q2 2014. Avigilon only added 30 total employees, up just 5% for the quarter (586 vs 556).

However, our tracking of new Avigilon employee online listings shows a bump over the past 3 months. The most notable is certainly the new VP of marketing, but many hires across sales and operations are occurring.

Though Avigilon talks about hiring 'A' players, the new employees we have seen are typically industry outsiders or junior people with a few years of low level experience. There is certainly no exodus of top tier talent from big surveillance manufacturers like Axis, Genetec and Milestone to Avigilon. And with the stock price dropping this much, that is an even bigger reason to stay away.

Low Cost Competition

Whether they admit it, all the major manufacturers are under attack by low cost competitors - companies like Hikvision and Dahua, in particular - with improving quality but radically lower pricing. Indeed, manufacturers overall admit this is their #1 complaint.

For Avigilon dealers, we see Hikvision as the most common alternative, often brought into Avigilon systems as a lower cost alternative.

Avigilon was once a low cost leader itself (before the Chinese manufacturer expansion) but they have held their prices firm while rivals have dropped (see our IP Camera Costs Comparison and Trends report).

Competitor Products Catching Up

Some investors are now thinking / believing / arguing that competitors are catching up.

Evidently, they did not see the innovation train wreck that was ASIS 2014. Milestone released a DVR, Axis key announcement was a PTZ accessory, etc.

Relatively speaking, Avigilon is doing quite well, even improving with their announcement of analytic cameras.

Accounting Irregularities

This summer, an alert on Avigilon Accounting Issues was released, pointing out various potential concerns.

None of them has been validated and Avigilon's CEO specifically denied channel stuffing. However, many investors are taking the approach of 'if there is smoke, there must be fire'.

Growth Rate Sharp Decline

Analyst consensus growth rate for the just concluded Q3 2014 is ~35%. While this is great for nearly every other surveillance manufacturer, this would be a drop in half for what Avigilons' recent growth was.

However, this projection has been established and known for some time, so it does not explain why the stock decline has been accelerating in the last month. One theory is that, since the quarter ended last week, the numbers have leaked and that they are even worse than the analyst estimates.

Irrational Pessimism

At the beginning of this year, investors were irrationally optimistic. The consensus was that Avigilon was going to grow at astronomic rates for years to come.

Now, it is possible that investors have just flipped the other way.

What's Next?

Avigilon's market valuation is ~$650 million, with ~$150 million cash in the bank. For a company whose trailing 12 months of revenue is $228 million, that's quite inexpensive, even if you think Avigilon is only going to be an industry normal 15-20% growth rate company.

The big risks are further management team problems and accounting irregularities. If either of those turn up to be true, the stock price drop could easily be justified. However, if Avigilon is simply transitioning to a 'normal' IP video surveillance manufacturer, upside exists.

Industry Impact

Rapid stock price declines can have major operational impacts. The pressure this brings on management is intense and frequently rolls down to the entire organization.

Avigilon needs its stock price to rebound (at least some what) to relieve that pressure and eventual investor calls for new executives.

Avigilon still has a strong competitive product, loyal channel and loads of cash in the bank. However, Avigilon's moves over the next few months will be critical in determining if it can recover.

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