Investors looking for the next big technology stock have largely ignored Netcomm Wireless Ltd (ASX: NTC), but the stock's surge to a 10-month high this morning on the back of a profit upgrade shows why you need to put the stock on your watch list.
Shares in the company surged 14% to 73 cents when management lifted its 2014-15 earnings before interest, tax, depreciation and amortisation (EBITDA) guidance to around $7 million from its earlier vague forecast of more than $5.2 million.
Sales revenue is expected to increase by 13% to $73 million thanks largely to pick up in demand for its wireless devices on the National Broadband Network (NBN). Netcomm is the exclusive supplier of wireless hardware to the NBN.
This implies a doubling in net profit for 2014-15 from the $1 million Netcomm delivered in the year before.
This is a watershed year for the company as it needs to deliver an even more significant step-change in earnings for the current financial year if the stock is to head higher.
It's understandable why Netcomm hasn't gained the same traction among investors as iProperty Group Ltd (ASX: IPP) or Carsales.Com Ltd (ASX: CAR).
The fact is we are drawn to services firms and not hardware developers thanks to the stellar success of companies like REA Group Limited (ASX: REA) and SEEK Limited (ASX: SEK).
Outside of healthcare, you'd be hard pressed to think of a really successful Australian technology hardware story and that is perhaps the biggest reason why many have shunned Netcomm with its machine-to-machine (M2M) solutions.
Netcomm develops chips that allow disparate devices to communicate on a network and applications of M2M include smart meters, contactless payment cards and remote medical monitoring – just to name a few.
There is scepticism about the potential of Netcomm's earnings as the market is huge. How can a $95 million market cap minnow compete successfully in this space?
Ericsson estimates that there will be 50 billion connections around the world by 2020 with 80% of this relating to the connection of "things". This equates to a market opportunity of nearly $US150 billion, according to Netcomm.
Perhaps investors aren't the only ones that are overlooking the opportunity. The major players have been slow to capitalise on the expected growth and that has allowed Netcomm to establish itself as one of the leading suppliers of communication chips as it signs up major partners such as Singapore Telecommunications Ltd and Hitachi.
However, investing in technology companies like Netcomm is only for those with a high tolerance for risk.
I am expecting the stock to shoot well past $1 but that is not going to happen anytime soon either.
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