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Great post @DrPete -- an interesting and well supported valuation.
For what it's worth, I started to have a look at AIM following the recent share price decline. I am still in the early stages of my research/deep dive, but my initial observations are similar to yours.
I have run a few short and sweet DCFs, and with each of them I struggled to get fair value around current prices without significant growth going forward. And based on the data we have, they have struggled to achieve this.
For instance, one of my models assumed 15% share price growth YoY, 15% dilution and a P/E of 20. Unlike you though my discount rate used was 10% for all models. Most of my models returned a share price around 0.40c.
If they are able to achieve 25% revenue growth YoY, I get a current fair value of around 0.60c.
Running models like this can be effective, but they obviously have their limitations. The ongoing increase in their margins -- as the pivot from the lower margin services to higher margin tech, and what this will mean -- is critical. And I simply don't know where to begin for estimating net margins in a few years time and what this might look like. But I still struggle to see how the current share price is an attractive one for entry.
AIM bulls, what are we missing?
@Rocket6 I guess I would qualify as an AIM bull given we still own it in the Merewether Capital Inception Fund (though admittedly trimmed some at higher levels when the share price got a bit silly).
AIM is a very difficult business to apply a rigorous valuation to given the very wide range of outcomes from a transitioning business model, the potential upside from upselling new features and the rapidly evolving technological landscape which may undermine AIM's competitive advantage. Not to mention overlaying all that with Tony's unnecessarily bullish "aspirational targets"!
To answer your question in short though, while revenue estimates can vary wildly looking out a few years, I think what is being overlooked in the conversation so far is that as AIM matures it should earn significantly higher net margins than 6-8%. AIM's Technology segment currently generates 86% gross margins, though even that is blended a bit lower by the physical hardware units. Pure Lexi revenue likely has gross margins >90% (see Tony's last Strawman interview where he confirms that the $2.7m in deferred revenue would only cost ~$200k to deliver).
Given the dominant >50% market share in US live broadcast and only one genuine competitor (Enco) I don't see a need for AIM to run an elevated opex base by being forced to run to stand still to replace churn. I think the ~35% of the opex base currently being spent on sales/marketing is genuine growth expenditure.
Looking to revenue growth, I think the Broadcast segments of AIM's "9 Squares" growth plan can be easily achievable. They have used their footprint in US broadcast to lead their peers in automation and new features and we are seeing the first green shoots in Europe/Middle East as seen below:
I think there is a clear path to at least double Technology revenue over the next three years just by expanding into new geographies with Broadcast customers.
The conversation on Lexi quality is an interesting one. There are a few videos online showcasing the product and I agree quality varies, likely due to conditions such as Lexi not being optimised for accents, specialised language, etc. I think it is worth monitoring given part of AIM's growth plans is to expand into live events, conferences, etc. where Lexi may not be able to operate in an optimised setting so quality needs to improve to win those customers.
But for Broadcast customers, questionable Lexi quality aside they are using it more and more:
Bear in mind for Broadcast customers they are generally legally required to provide captioning on all programs and if AIM can demonstrate Lexi meets NER benchmarks the cost savings alone (~$100 per hour for a live human to ~$12 per hour for Lexi) will mean they will switch across.
Anyway I agree it's hard to model accurately and I can see the reasonable arguments that today's share price is overvalued for what AIM is today. But I think there is a very achievable bull case for seeing continued growth in Broadcast customers, with the blue sky of Government/Enterprise customers and the much higher ARPU of Lexi Voice ($30 per hour).
@DrPete A great post. Thank you for sharing your take here on AIM.
Your detailed and thoughtful valuation and associated posts have come at a time when I was on the verge of buying in.
Your comments and the discussions with others here in the last couple of days, have given me pause for thought.
Cheers