With thanks to Morningstar

Analyst Note | by Roy Van Keulen Updated Aug 06, 2024

We lower our fair value estimate for narrow-moat Audinate by 20% to AUD 18.50 per share after the disappointing prerelease of fiscal 2024 results. While the fiscal 2024 result is in line with our revenue and profit forecasts, guidance for fiscal 2025 signifies a dramatic, unexpected slowdown. The share price nearly halved at the open, before recovering to trade down around a third. We view Audinate shares as materially undervalued as fiscal 2025 is likely a transition year, after which growth will reaccelerate and margins will expand again.

The deceleration has two main drivers, a resolved backlog of hardware products and a transition of the business from hardware-based sales to software-based sales. Although both drivers were known, the magnitude was much greater than expected. We previously forecast 24% revenue growth for fiscal 2025, marginally above market consensus at the time, but now lower this to negative 9% in line with guidance.

The transition from hardware-based sales to software-based sales is accelerating. Although management expects revenue to decline in fiscal 2025, gross profit is expected to be only marginally lower given higher average gross margins. Gross margins for the second half of fiscal 2024 are expected to be 5% higher than in the first half, based on the preliminary results. The guidance for fiscal 2025 implies another 3% increase in gross profit margins, compared with the second half of fiscal 2024. This exceeds our prior gross margin expectation for the year by 7% and reflects a shift to higher-margin, though lower-priced, software sales.

Note from Macquarie courtesy of FN Arena

Macquarie rates AD8 as Neutral (3) -

Macquarie observes the current Audinate Group share price is reflecting a free cashflow compound average growth rate of around 42%, which the broker states is a "high bar to meet".

The analyst points to the cyclical nature of the company's hardware sales with an estimated 89% of revenues as non-recurring, and the discounting of AVIO adaptors, the second most important revenue generator.

Including the potential cannibalisation of revenues from new products like Dante Director and challenges around cash positions, M&A and recent management changes, the broker revises earnings forecasts for by -23% and -25%, for FY25 and FY26, respectively.

Accordingly, the target price is lowered -20% to $14.40 from $17.90 and the Neutral rating unchanged.

Target price is $14.40 Current Price is $15.20 Difference: minus $0.8 (current price is over target).

If AD8 meets the Macquarie target it will return approximately minus 5% (excluding dividends, fees and charges - negative figures indicate an expected loss).

Current consensus price target is $20.02, suggesting upside of 40.2% (ex-dividends)

The company's fiscal year ends in June.

Forecast for FY24:

Macquarie forecasts a full year FY24 dividend of 0.00 cents and EPS of 10.60 cents.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 143.40.

How do these forecasts compare to market consensus projections?

Current consensus EPS estimate is 9.2, implying annual growth of -33.1%.

Current consensus DPS estimate is N/A, implying a prospective dividend yield of N/A.

Current consensus EPS estimate suggests the PER is 155.2.

Forecast for FY25:

Macquarie forecasts a full year FY25 dividend of 0.00 cents and EPS of 11.40 cents.

At the last closing share price the stock's estimated Price to Earnings Ratio (PER) is 133.33.

How do these forecasts compare to market consensus projections?

Current consensus EPS estimate is 15.7, implying annual growth of 70.7%.

Current consensus DPS estimate is N/A, implying a prospective dividend yield of N/A.

Current consensus EPS estimate suggests the PER is 91.0.

AD8 down about 10% over last 2 days on very low volume. Topped up today at 14.28. Looks like a broker note from Macquarie may be responsible today with a price target of 14.40

AD8 down around 30% since high of 23.50. How low will it go?