Forum Topics Audin-overate?
Wilbury17
2 months ago

So Audinate shares have well and truly popped over the last 6 months or so. I'm wondering the process people use to re-rate their share valuations and when the share price eclipses their valuation do they sell? Im well aware of the pain associated with getting off the bus too early, but I guess I recognise there's an alternate bias operating where you dont want to miss that 10 bagger so you hold on too long. Interested in any thoughts anyone has. Owned in RL not in SM.

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Duffshot38
2 months ago

Maybe ask someone else as my process is to sell way too early or way too late (often when you cant as they go to zero!)

ALU way early

RFT not yet coz they wont let me

3DP way late and trhey wont let me


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actionman
2 months ago

@Wilbury17 In the case of a multi-bagger, I use a fairly simple process where I don't let a position exceed 10% of my share portfolio IRL. I don't want to be too exposed to one position. So I sell down every few months to keep it at 10%. I never sell completely if I still have conviction in the business that way you won't miss out completely if they keep getting better. IMHO It's just a position sizing question.

Matt Joass has a good write up on selling strategies here: https://mattjoass.com/2019/02/09/when-to-sell/

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Bear77
2 months ago

You can't value a company like Audinate using regular valuation models, because their TAM is so huge and growing, and they are so far ahead of their competition that their competition is virtually meaningless. Think about Bluetooth. Bluetooth was a JV, not a public company, so you could NOT buy shares in Bluetooth, and they weren't owned by any single company that you could buy shares in either, but think about the competition that Bluetooth face - what competition? There's just Bluetooth - that's what all equipment manufacturers use for wireless networking between devices, so you can't afford to build anything in consumer electronics these days without including Bluetooth, or people won't want to buy it or own it. Audinate's Dante Platform is going the same way - in digital AV (Audio-Video) networking using ethernet cables/networks, albeit a smaller market than Bluetooth, whose market is everyone on Earth, but still a very large market. Intended primarily for use in professional and commercial audio/video environments, DANTE is a combination of hardware and software used to transport multi-channel, digital audio and video over a standard IP over Ethernet networks. It's best explained here:

https://www.getdante.com/meet-dante/what-is-dante

It's the ULTIMATE network effect - because they are an AV networking company - and every manufacturer of professional AV gear is going to include Dante in their equipment - most have already. It's a real juggernaut.

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AV Issue 56 by Alchemedia Publishing - Issuu


Disclosure: I hold AD8 both here and in real life. In my real money portfolio (my SMSF), I bought them at $9 coz I thought they would soon hit a profitability inflection point - and they did, not long afterwards; it's nice when a plan comes together. It's harder to pay up at current prices, but I reckon they'll be well above these levels in 5, 10 and 20 years' time. It's become the largest position in my SMSF simply due to the share price rising so much, but I'm not trimming them here.

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Remorhaz
a month ago

I'm unsure if I have anything meaningful or useful to add

Looking now I can see that similar to @Bear77 my average RL buy price is $7.80 (first bought in 2021 (@$8.80) then more in 2022 @ $6 and $6.50 and then finally a little more in 2023 (looks like it must have been an SPP @ $13 - just enough to not be diluted). Also like Bear it appears to have (just) become my biggest single stock holding (87%pa gains obviously helps! :))

However unlike Bear and others, my individual stock selections sleeve of the overall portfolio is < 10% of our overall portfolio so even with AD8's gains it's still barely more than 1% of our total RL portfolio so it's probably not really moving the dial much either way

I'm aware of the temptation to end up getting out too early, and the experience of not getting out and then some holdings going to near zero (@Duffshot38 I feel your pain) - but either way for me (these individual stock selections are more about the interest, enjoyment and learning about investing much more than the value creation in our portfolio). So as the holdings are relatively small anyway I'm not as affected by issues of position size and so on - so to @actionman's point, unless something 10 to 100 bags it's not going to get big enough to be a factor

That said - like Bear I like AD8's business and believe they have a long way to go so am happy to hold (but like I said having conviction is much easier when it's still only 1% of the portfolio ;))

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Slomo
a month ago

It’s a really good question @Wilbury17 and I’ve had similar thoughts.

I think part of the answer is that it really depends on your strategy (and your biases) – I am trying to add the highest quality businesses when they look like good value and hold them for as long as they remain high quality.

For disclosure AD8 is my highest conviction business but at the current price not my highest conviction opportunity.

So in theory it shouldn’t be my biggest but it is – because I can’t bear to sell it. This is probably the worst reason to hang on so let me try to explain…

Biases

Partly, I am biased by past experiences… Another high quality business I hold PME, looks expensive too but each time I have sold it has been a mistake for 2 reasons – 1) it maintains / improves it’s quality and 2) time keeps ticking away (I am not active in trimming and adding frequently).

I am now down to 1/4 of my original PME position which is a 20 bagger for me. So needless to say I should have just held it all while it remained / improved it’s quality.

While different in many ways, I see AD8 as a similarly high quality business although less mature.

I actually think these metaphors (especially vs PME!) can be very dangerous as it can relax your critical thinking in favour of an overly simplistic heuristic but for now, it’s a useful model to think about how to deal with a bulging position in one of the best businesses I have ever owned.

I sold ¼ of my AD8 position at < $9 less than a year ago on valuation grounds and in the interests of better position sizing / portfolio balance / diversification. Needless to say this now feels like a mistake.

I was on here a while ago posting a valuation of $25 for AD8 when its price was about $15 from memory. I actually thought the 1H 24 result had a good chance of being weaker than expected and the price might fall but here we are.

Ask the Bear

As @Bear77 says, you can’t really value AD8 on the usual statistical models as these make no sense. My high level thesis is similar to what @Bear77 7 laid out here.

I used a probability weighted (Base, Bear & Bull cases) simplified DCF model to come up with $25. But that was before the 1H 24 result and I didn’t think the market would get here so quickly. It seems the 1H 24 results are maybe being extrapolated, despite Aidan saying they won’t be repeated in (the typically stronger) H2.

The risk with my approach is that the price falls significantly from here – because of the FY24 result or some other reason.

If the recent highs turn out to be all time highs, holding here will be a very expensive mistake. If recent highs are not surpassed for a long time, I will also forego (unrealised) returns – this is the biggest risk I expect.

Quality, quality, quality

The best businesses are always setting new highs and that’s what AD8 has been doing, while the business quality (mkt position, cash position, moat, margins, mgmt. execution, etc), and the market opportunity (TAM growth, Industry tends, adjacencies, optionality, etc) have both been improving.

Part of my thinking is that with the highest quality businesses it’s more important to be right about the quality, the market opportunity and how these change over time than the valuation / price - not my idea but can't recall where I stole this from.

So my plan is to focus more on tracking the business quality and market opportunity than the market price vs valuation estimates or the position size in my portfolio. Can’t ignore these of course, but I don’t want to be spurred into action by them when the biggest returns from the best companies are made by holding for a long time.

It helps that I first bought AD8 in 2018 and my average cost is $5.26, mainly thanks to Covid belting it. So I have been following closely, through ups and downs for a while, hence my high level of conviction. Only time will tell if my biases will outweigh my execution of a sensible strategy...

Disc: Held (23%)

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