August 13, 2013
Q: What’s the enterprise value of this audio processing technology company the following financial profile?
• Balance sheet cash of $129 million and no debt
• Q2 2013 annualized revenue of $180 million, +30% over Q2 2012
• Q2 2013 annualized pre-tax income of $22 million, +19% over Q2 2012
A: $104 million at today’s $10.05 stock price
Q: Less than 5x annualized operating income? Why is the valuation so low?
A: It’s primarily attributable to customer concentration. 89% of ADNC’s Q2 revenues came from two customers – 66% from Samsung and 23% from Apple. The company also forecasted a challenging Q3 before resuming growth in Q4. Efforts are being made to diversify away from Samsung handsets and expand the product lineup to include audio chipsets for PCs, tablets, gaming consoles and even automobiles. These growth initiatives are very promising but not yet established.
Note to self: no matter its dominance in its core product area, a company with excessive customer concentration and low product diversity may be destined to trade at a mid-single digit multiple.
We're not the only ones puzzled at the current valuation. ADNC's CFO bought 20,000 shares of stock at $14 in May.
Disclosure: Twinleaf clients have small positions in ADNC, not all of them underwater at the current stock price. The portfolio manager is not a seller at the current share price.
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