Digital audio networking group Audinate Ltd (ASX: AD8) hit the ASX boards back in June 2017 after raising around $21 million at an initial public offer (IPO) price of $1.22 per share.
At the time of the IPO the group was valued at $72.6 million or an enterprise value of just $57.9 million when you back out the $14.7 million cash on hand it possessed.
Fast forward just 30 months later and the stock is up nearly 600% to boast a market value of $596 million based on 67.42 million shares on issue after a June 2019 capital raising at $7 per share.
So what does Audinate do?
As I’ve explained previously, Audinate’s key product is its Dante enabled audio equipment (hardware) that improves sound quality when installed in standard audio equipment.
The company’s hardware and software allows professional audio equipment (speakers, mixers, mics, etc) to carry audio signals over a computer network, rather than using analog cables.
The advantage of this is that audio professionals can deploy audio solutions using existing computer networks instead of running analog cables throughout a building or venue.
Audinate reportedly also has a strong competitive position as its Dante product is preferred by audio equipment manufacturers, which all suggests the future is bright.
Audinate also sells software to enterprise clients so they can use computers to control their audio visual networks.
Facebook Inc for example is both a hardware and software client meaning its audio visual engineers use the products across the meeting and conference rooms at its Silicon Valley-based headquarters.
Why is this important?
Audinate could be a rare business on the local market in that it appears to possess a market-leading tech product that is creating a whole new market in online audio networking.
This is conceptually similar to how the voice communications market has transferred from fixed landline transmissions to voice over internet (VoIP) apps such as Skype or WhatsApp.
Many successful investors commonly identify the qualitative traits Audinate boasts as indicators a business may be a long term success.
For example Audinate has blue-chip tech clients, a market leading product, high gross profit margins (around 75 per cent) and is arguably creating its own network effect as audio equipment manufacturers choose to embed its Dante product into their hardware.
So is it a buy?
Admittedly, it would have been smarter to identify and recommend this stock when it sold for $1.30, rather than $8.42 today.
Its potential is no secret now with a lot of growth now baked into the valuation. For example over FY 2019 it posted a profit of $662,000 on sales of $28.3 million, which compares to today’s valuation of $596 million.
However, brokers like UBS and Morgan Stanley are still positive on the business having 12-month price targets of $9.45 and $10.30 respectively, despite the relatively low revenue profile.
Over time it’s possible the company’s valuation goes far higher.
The big risks are that it doesn’t deliver on its potential or gets hit by competition in the same online audio networking space. If these scenarios transpire the shares could plunge.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Tom Richardson owns shares of Facebook.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Facebook. The Motley Fool Australia owns shares of and has recommended AUDINATEGL FPO. The Motley Fool Australia has recommended Facebook. 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.