Prudential notes that trading in Avici Systems (NASDAQ:AVCI) shares has spiked this week, accompanied by a swift move in prices over the past 3 days. This week, nearly 40% of the outstanding shares have traded (nearly 5.5M shares), vs. the 20-day average daily volume of about 400K going into the week, though spikes as high as 60%-70% of total shares in a single day occurred twice in the past year at earnings releases. Firm does not believe this recent trading is driven by positive long-term fundamental developments for Avici.
AVCI is almost entirely dependent on a single customer, AT&T, which uses AVCI products as its primary core routing platform. Given AVCI's limited resources to support development, both monetary and in headcount, firm expects AVCI to be displaced as sole core provider to AT&T, something AVCI has also acknowledged in filings.
AVCI started seeking potential buyers more aggressively in 2/06, coinciding with a near 50% cut in headcount, but by the end of '06, none had emerged. Some potential buyers, including Huawei, Alacatel-Lucent, and Nortel, have exited previous reseller/OEM agreements with AVCI, hardly the action of interested buyers. At this point, firm believes it is unlikely AVCI will find a buyer in the telco vendor community. Nor do they believe AVCI is seeing traction yet in its SOAPSTONE project, which is still in early development.
Reiterates Underweight and $6 tgt.
Notablecalls: Expect the stock give back at least some of this week's gains.