Ixia (NASDAQ:XXIA) is the sort of story that can really frustrate a value-driven investor. On one hand, I see quite a bit of margin leverage potential in this model, and I do believe that the company's adjusted free cash flow margins could improve by around 50% over the coming decade. Unfortunately, a lot of that seems to be in the stock price already. What's more, while the company's improving margins would likely generate more investor enthusiasm for higher multiples, tech companies with relatively modest revenue growth prospects always seem to reach a ceiling when it comes to those multiples.
So, there's a value conundrum here. I'm inclined to say that the business is fundamentally a little undervalued now and more aggressive investors can perhaps look toward improving business fundamentals to drive more of a sentiment-based recovery that goes beyond the underlying cash flow value (which, in its own right, is hardly a fixed and inarguable point). All that being said, if that margin leverage fails to materialize, and this is a company that has never earned a compelling a return on its assets, equity, or invested capital, this stock isn't going to do so well.
Ixia Needs To Translate Good Technology Into Consistent Performance