Research Tactical Idea - Morgan Stanley - July 18, 2023

Please note: Morgan Stanley put out a disclaimer that this tactical idea should not be relied on. This is just an archived article.

We believe the share price will rise in absolute terms over the next 60 days.

Our conviction on results upside is driven by; 1. Revenue visibility, where we think US$22.7m 2H23e is highly achievable - implying an incremental US$2.1m HoH, with supply likely continuing to improve, further supported by elevated backlogs and overall robust industry demand, and conservative Video guide. AD8 was also tracking to market expectations May end; 2. Scope for cash flow breakeven in 2H23 or at least that AD8 comes close; and 3. Further Video execution and adoption supports the outlook. Also see "Key Ideas Result #2: AD8".

We estimate that there is about a 70% to 80% (or "very likely") probability for the scenario.

Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario.

Why AD8 made the list: 1) Revenue visibility –US$22.7mn 2H23e consensus implies an incremental US$2.1mn HoH, which we think is highly achievable. (a) Supply should continue to improve over 2H (drove a 20% decline in 1H Ultimo sales). (b) Elevated backlogs provide revenue visibility. (c) A\2H23 AV demand is robust. (d) No trading update at May end, but AD8 was tracking to market expectations. (e) Video guidance could be conservative – >US$3mn FY23 guidance implies >US$1mn in 2H23, which we find conservative given 2H23 adoption announcements. 2) Scope for cash flow breakeven in 2H23 –We reiterate our maths from 1H23. Again, we think being "close" to cash breakeven is sufficient evidence of self-funding + balance sheet optionality. 3) Video execution and adoption – across OEMs, products and now revenues. We are now seeing the video story accelerate.

What's not in the price – conviction in fighting the fade at 7.6x FY25e EV/Sales: 1) 26-31% revenue growth sustainable with audio – We walked away from our Summit more confident. AD8 noted that audio penetration (<10% today) can sustain 26-31% growth alone vs. the market's base case of c. 26% growth with accelerating video contribution. 2) Dante AV-A increases serviceability of video TAM – expected to open up c. 50%. We think it's worth recapping AD8's video journey. The company did not get it right initially – it lacked key products (Dante Video in software form) and the right sales/R&D expertise. However, it recognised these gaps, made moves to bolster capabilities (Cambridge + Silex), and that adoption story is now playing out with Dante AV-H. We have similar conviction in AV-A. 3) Margins, cash flow, balance sheet optionality – Our base case is that AD8 becomes self-funding from FY24e with a more obvious earnings profile from FY25e. We think the strategic focus remains audio and video, but incrementally, we see scope for greater clarity and future reinvestment, e.g. into the (user) software opportunity/adjacencies like broadcast.

Key risks: 1. Cyclicality – AD8's end market is cyclical with capex projects, though reopening tailwinds, structural share, and backlogs give confidence in delivery. 2) Gross margins + cash burn – base case is trajectory towards cash breakeven, but continued depressed GM (expected to rebound) could weigh on cash.

Little snippet from Capital IQ Pro on sentiment for Audinate as I don't know my restrictions on reposting content from my trial subscription. Probably doesn't mean much in the grand scheme of things although I do wonder the interpretation of being 1% on sentiment.

But transcript and the recording helps understand the product a bit more at a high level.

Thought I'd post as I see the stock price has trended up since the last on market selling by the CEO.

Director transactions

CEO Aidan sells AUD $1m worth of stock on market. Not going to speculate but understand it could be for many reasons including paying the bills. Still holding millions of stock so maybe nothing.

Non exec director does a purchase.

Since there's been so much interest on Audinate, I thought I'd share this link

FNArena's Rudi pens his thoughts on AD8 in this youtube session with Switzer

https://www.youtube.com/watch?v=iAeWVsVuEsg

Start from 17.30. AD8 mentioned at 22:00

Has a cautious view on AD8 but on his watchlist.

Other stocks include TYR, MP1 and PME.