ClearOne's Future A Little Blurry

A few weeks ago, frankvoisin.com featured ClearOne Communications (CLRO) as a potentially undervalued stock. Check out that article for a great rundown of why the stock might be cheap and what some of the risks may be. While the company's price is certainly enticing, I'd like to add one more risk that ultimately stopped me from buying this stock.

ClearOne does occupy the number one position as a provider of hardware solutions in the global audio conference market with a 50% market share. To some extent, this may allow it a cost advantage in coming up with better solutions than its competitors; ClearOne's $8 million R&D budget is spread over more units, theoretically allowing it to deliver better products for less.

This advantage appears to have been effective. Market share has remained stable over the last few years, while gross margins are quite high at around 60%. But be wary of industries where technological changes can render companies obsolete. ClearOne may operate in just such an industry.

As portable computing devices become smarter and ubiquitous, there may not be room anymore for a hardware provider of conferencing equipment. As phones/tablets/PCs and other devices come equipped with better audio/video hardware, the key to conferencing solutions may lie in software apps, where ClearOne may not enjoy any advantage.

On the company's latest conference call, the CEO did acknowledge the industry may have reached an "inflection point in conferencing" but that the company would be able to remain successful "with hard work and good luck".

Unfortunately, disruptive technologies can play havoc with earnings expectations. And if one can't have confidence in future earnings, one can't have confidence in one's margin of safety. As such, ClearOne may belong in the "too hard" pile for now.

Disclosure: No position