Why the Audinate share price is up 57% in 2019

The Audinate Ltd (ASX: AD8) share price has risen 57% to $5.40 in 2019 following the release of a couple of bullish announcements by the audio networking company. A positive 4C report in January and an impressive half-year result in February that exceeded the market’s expectations have been the main drivers in propelling the stock to record highs.

Top-line surges

For the half-year ended 31 December 2018, Audinate recorded revenues of $14.2 million. Revenue was up 60% over the prior corresponding period which reflects the increase in demand for its award-winning Dante audio over IP networking solution. Dante can replace traditional analogue audio cables by transmitting audio signals across large distances and multiple locations at once using an Ethernet cable.

The significant increase in revenue was driven by a 59% increase in shipments of Dante units (chips, cards, modules, adapters & software). Contributions from Dante AVIO adapters (connecting legacy equipment to Dante) and Dante Domain Manager (system management software) also helped lift revenue higher over the prior period.

The top-line was also boosted by a weaker Australian dollar as the company invoices its customers in US dollars. In US dollars, revenue climbed to US$10.3 million, a 51% gain over the US$6.8 million generated in the prior corresponding period.

Total expenses were up 34% to $8.7 million, reflecting the increased headcount to support new products. Operating leverage is beginning to take effect with Audinate reporting EBITDA of $1.7 million versus the $0.1 million EBITDA recorded in the prior corresponding period.

Foolish takeaway

Audinate continues to benefit from the network effect with Dante enabled original equipment manufacturers (OEM) products available for sale increasing to 1,751, up from 1,292 at the same time last year. The company added another 31 OEMs during the first half, bringing the total to 455 at the end of December.

At current prices, Audinate has a market capitalization of $348 million (fully diluted) with $12 million in cash at the end of December. If we assume FY19 sales of $30 million, this means the stock is trading for an enterprise value to sales ratio of around 11.

For the near-term, this is starting to look expensive and any profit-taking after such a large gain in the share price would not be a surprise. However, any material correction would be a buying opportunity for investors that are comfortable with investing in high-growth small caps as the company’s bullish thesis remains intact.

Other small-cap tech stocks for growth investors to monitor alongside Audinate include Elmo Software Ltd (ASX: ELO) and Megaport Ltd (ASX: MP1).

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Elmo Software. The Motley Fool Australia owns shares of and has recommended AUDINATEGL FPO. The Motley Fool Australia has recommended Elmo Software. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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