I apologize for the typos in the previous post. I did it in an extreme
hurry yesterday.  I wish the posts here could be edited or deleted,
but obviously they cannot be.  The following is the corrected post.
This corrects typos and makes a few amendments on the description, and
is meant to completely replace the previous one.

The market is completely misunderstanding the data. The annualized
earnings rate based on the last quarter (ending December 2007) is
nearly $.60.  The forecast for annual revenue growth is 28%.  And also
importantly, the company forecasts a cost increase rate of 20%, below
the forecast revenue growth rate of 28%. It is mathematically
significant that the increasing rate of cost is lower than the revenue
growth rate, because this translates to an earnings growth rate
significantly higher than revenue growth rate. For any company, if the
cost increases at the same rate as the total revenue, the earnings
will also grow at the same rate. If the cost increases slower than the
revenue, earnings will grow faster than the revenue. This is pure
math.

In the case of Ceragon Networks, for example, the earnings will grow
at annual rate of 28% even if the cost grows at 28%, the same rate as
the revenue growth. If the increase of cost turns out to be close to
the lower 20% forecasted by the company, you will actually see the
earnings growing much faster than the revenue growth rate (forecast
28%). The math here is a bit more complicated, and the actual numbers
also depend on the current profit rate. The calculation would go like
this:

Earnings growth rate = (revenue growth rate x revenue - cost growth
rate x cost)/earnings

= revenue growth rate + (revenue growth rate - cost growth rate) x
cost/earnings

You can see there is an extra contribution to the earnings growth rate
on top of the revenue growth rate. The extra contribution is
proportional to the difference between revenue growth rate and cost
growth rate. Of course, this term would become a minus if the cost
growth rate is greater than the revenue growth rate.  So it works both
ways.

Also significant in the above formula is the factor "cost/earnings".
The formula shows that, a growth rate difference (revenue growth rate
- cost growth rate) translates to an extra earnings growth rate with a
multiplication factor of "cost/earnings".  The higher the current cost/
earnings ratio (a term inversely related to profit margin) is, the
greater the extra contribution to the earnings growth rate.  This may
strike you as counterintuitive, but it really should not.  It
basically means that it is easier for a company that has a low profit
margin to grow its earnings at a faster rate.

Now, let's plug in the current members of CRNT:

revenue growth rate = 1.28 (28% increase);
cost growth rate = 1.20 (20% increase);
(revenue growth rate - cost growth rate) = 1.28 -1.2 = 0.08; and
cost/earnings ratio = roughly 10 (equivalent to a present estimated
profit rate around 8%).

You would have a shocking 2.08 earnings multiple, which is a 108%
growth. Actually, this is very much what happened in 2007, in which
the revenue grew at 49%, but earnings grew well over 100%. Of course,
the above numbers for 2008 forecast can only be as true as the assumed
growth rates based on the company forecasts.

The bottom line is that, if the revenue growth rate is close to 28%,
and if the cost increases slower than 28%, the earnings will grow
faster than 28%. For each percentage point the cost growth rate is
below the revenue growth rate, the earnings growth rate will receive
an additional 10 (not 1) percentage points contribution. For example,
if revenue grows at 30%, and cost grows 5% slower than that (that is,
25%), the earnings will grow at 30% + 10x 5% = 80%.

Now back to the current price of the stock. With annualized earnings
based on the last quarter reaching $.60, we are looking at a PE ratio
of 14 at the present price. That's insane, unless you believe the
company's earning growth rate is going to be no higher than 10%
annually. The calculations above show that the company is actually
forecasting, implicitly, an earnings growth ratio of 100% annually.
But let's be conservative and cut that in half to 50%.  We would be
looking at a fair price of this stock at $18 if you believe a P/E of
30 is reasonable for a company whose earnings grows 50% annually; or
much higher than $18 if you use the conventional rule of thumb of
pegging P/E roughly at the credible annual growth rate.

The market is insane in terms of its emotion, and stupid in terms of
its intelligence.