It’s been a long time since I looked at an Australian teaser pick, so this new pitch for the Motley Fool Australia’s Share Advisor (A$199/yr) caught my eye.
The Motley Fool, well known as a US newsletter publisher and investment community/website in the 25 years or so since the Gardner brothers started their AOL chat board and David Gardner, in particular, gained a strong following thanks to his early and stubborn picks of growth stocks like Marvel, Netflix and Amazon, has been expanding in fits and starts over the years, mostly in English-speaking countries. Each of these, from Canada to the UK to Australia, has its own group of writers and analysts, sometimes pulled from the US stable, but none have been around nearly as long as the “core” US products like Motley Fool Stock Advisor.
Like the Canadian version of the Fool’s “flagship” newsletter, this Australian one picks at least one favorite Aussie stock each month and also picks one US stock, since much of the world’s focus remains on the US markets.
And for this ad, the Aussie Fools are pitching a stock that is being recommended by Scott Phillips, Lead Advisor for Motley Fool Share Advisor… they call it the “single greatest Australian tech company” and “Tesla’s Shadow” — the company that has been key to making Elon Musk’s glorious dreams a reality, and that specifically makes possible Musk’s well-publicized (at least in Australia) bet (with fellow billionaire, Atlassian’s Mike Cannon-Brookes) that he can built a massive battery power plant in 100 days to help solve South Australia’s blackout problems.
So what is it? Let’s start with the clues:
“A six-letter, $742 million company that hardly anybody inside or outside of Australia has even heard of….”
That might actually be enough for some of you… but let’s see what else they drop by way of hints. More from the ad, in which this secret Aussie firm gets credit for making Elon Musk’s previous boasts come true, including the Gigafactory:
“… despite construction first being reported on the giant, monolithic structure in early 2015, Tesla proudly announced the official “Grand Opening” of the Gigafactory back on 29 July, 2016…
“A mere YEAR AND A HALF after the first studs and pylons started going up! Meaning that, once again, Elon Musk has pulled off the impossible.
“And he has our small Australian tech company to almost single-handedly thank for it….”
The “proof” of this connection comes from a couple of the “secret” company’s investor reports, which cite major projects for Tesla as “Key Project Wins.”
More from the ad:
“Anytime Tesla has a major project they need completed in an exceedingly short time frame, traces of our small Australian tech company turn up shortly after (at least for those who know where to look).”
And they make the rather stretched comparison to Intel — which was sort of IBM’s “Shadow” in what they claim is a similar way, supplying the chips for IBM’s (and soon Microsoft’s) personal computer revolution.
“Right now, I think they bear a remarkable resemblance to Intel – just before it truly started to take off on that historical 15,795% run….
“Like Intel did for IBM, our little-known Australian shadow company provides a niche service that a larger and more widely known mega company relies on to carry out their most important projects.
“Also like Intel, they chose to focus on honing that one niche service to perfection, instead of diversifying into other areas they may be less competent and qualified in…
“But unlike Intel, who runs a rather capital-intensive manufacturing business, our tech company actually has an incredibly capital-light business model.
“You see, they provide a software platform that coordinates the entire range of things required in construction projects….”
So this “shadow” company is some sort of construction management software provider. Other clues?
“Instead of having to pay hundreds upon hundreds of highly error-prone individuals to manage your ridiculously complex multibillion-dollar projects, you simply pay one steady and reliable company to automate the ENTIRE process for you – from start to finish!
“Meanwhile, our company collects a simple, recurring fee from the client – just like how you’d pay for a recurring Foxtel membership (though obviously dramatically more expensive).”
And, we’re told, the market for this kind of software is huge:
“… in 2018 alone the output of the global construction industry is expected to be around $18 trillion. With a ‘T.’
“Yet incredibly, the global penetration of ‘construction collaboration software’ – as our company calls it – sits at a mere 4% to 5% of projects. Meaning this entire market is almost entirely untapped!”
Perhaps another hint or two about the actual company to help us narrow it down?
“… despite initially floating their shares a mere two and a half years ago, our company is already THE market leader in countries with the highest penetration of this construction collaboration software (the UK, New Zealand, and, you guessed it, Australia)…
“… in that short time frame, their share price has quickly shot up by 118% – more than doubling every dollar invested! …..
“… in fiscal year 2016 alone this company’s revenue jumped by 50%, continuing an eye-popping trend of predictable growth….
“… an incredible 29% compound annual growth rate over the past half-decade, with no end in sight!”
The company still seems to be founder-led, with “skin in the game” from those insiders, which is one of the things the Motley Fool tends to focus on:
“One co-founder is currently the CEO, and the other is a senior VP. Both also sit on the board of directors, and together they hold a hefty 12% of outstanding shares.”
And, apparently, this bet is also a bit contrarian — a growth stock that lots of folks consider to be overvalued (which is one of the key criteria David Gardner typically refers to when identifying “rule breaker” companies, he wants Wall Street to think they’re overvalued)….
“… our little tech company in Tesla’s shadow was recently named as the most heavily shorted share in all of Australia, just like Tesla was in the states.”
So who is the Fool hinting at here?
This Aussie tech stock is Aconex (ACX in Australia, ACNXF OTC on the “grey market” in the US).
Do note that if you happen to become interested in this one, trading the shares in the US is likely to be expensive and frustrating — only a few thousand shares have changed hands in the last month using that ACNXF ticker, which mean the trading is extremely illiquid. That, in turn, means you’d likely have to pay much more than fair value to buy the shares and, much more importantly, accept much less than fair value if you want to sell. Selling these kinds of stocks when there’s no buying interest in the US can sometimes be near impossible. So that’s your “whoa!” note before we start to look at the stock — unless you’re absolutely committed to the stock and would be excited about paying almost any price and owning it for many years, buy it on its home exchange in Australia, not OTC in the US.
What else do we know about Aconex? Well, it is indeed a “cloud-based” construction management software company, and they do count Tesla as a customer. And as of a few months ago, they were one of the most-shorted stocks in Australia, with something like a quarter of the float sold short — there’s a good Bloomberg article here that gives some of that price history if you’re curious, and talks about some reasons for the stock’s steep fall from A$8 at the peak about a year ago to under A$4 at the trough (it’s around A$4.50 now).
Here’s how the company sums themselves up on their website — they’ve actually been around for a quite a while, despite only being public for a few years:
“Aconex provides the #1 cloud and mobile collaboration platform for the global construction industry. This platform connects owners, contractors and their project teams in the construction, infrastructure, and energy and resources sectors, providing project-wide visibility and control between the many different organisations collaborating across their projects.
“Founded in 2000, Aconex has 47 offices in 23 countries around the world. The company’s ordinary shares are traded on the Australian Securities Exchange (ASX) under the ticker code ACX and are included in the S&P/ASX 200 Index.”
The company reports in about a week, on August 22nd, so there’s substantial risk in making a decision right now — they could easily either surprise on the upside and say something optimistic that causes a short squeeze (which is part of the Fool’s hinted-at reason for buying the stock), or they could further disappoint, as they did earlier this year when growth was much lower than hoped.
The business itself has a lot to like about it — it is a recurring revenue business with software licenses and subscriptions, which means it is extremely scaleable and that margins should rise as revenues rise (they don’t need to write new software for each new customer, so costs don’t rise much), and it’s also probably a “sticky” business in that companies working on large construction projects are not likely to choose a different software package each time.
I don’t have any idea what the competition looks like, which would be a major thing to get your head around before committing much to this kind of investment — are there other software packages that are similar or better? Can they take market share in the large US, European and Asian markets and leverage the product development they’ve mostly done in Australia and New Zealand? Those questions I can’t answer after skimming their info for a half hour or so. I know there are lots of companies that sell what they call “construction management” software, but I don’t know where Aconex’s product might rank, or what it means when they say they are “#1 globally.”
If you’d like to familiarize yourself with the company quickly before they report their next results, they do have an Investor Conference Presentation up on their website from May.
The picture is one of a company that is priced for growth and margin expansion, since they trade at a very rich valuation even after taking a hit this year — the market cap is just shy of A$900 million and their guidance is for A$160-165 million in revenue and A$15-18 million in EBITDA (they don’t seem to have any debt to speak of, though they do have substantial depreciation and amortization charges, including amortization of the goodwill they acquired in their acquisition of Conject last year), so that’s an Enterprise Value/EBITDA ratio of over 50 (and price/sales of about 5.5). Conject is their relatively large acquisition that gives them a bigger presence in Europe, they raised about A$100 million to make the deal last year at prices pretty close to where Aconex trades today, so those of us who are just learning about the stock have missed a wave of optimism following that acquisition and a wave of pessimism after they disappointed in the year since, so we have the benefit, perhaps, of seeing this with fresh eyes.
Aconex states in several places that they expect top-line growth to be over 20% for the “medium to long term”, and that should, with margin expansion, allow them to generate much higher EBITDA and earnings growth than that, but there’s clearly some uncertainty at this relatively early stage…. particularly because the first half of this fiscal year was disappointing, with the Conject/Europe business and the Americas and “rest of world” businesses both failing to generate the growth they had expected. You’re buying a growth story, and the growth has started and they have a good foundation of customers and the very beginnings of what they hope will be a strong “network effect” that, ideally, builds them into a dominant industry-wide player (the more customers use them, the more employees and subcontractors rely on the service, the more it becomes “standard practice” and the customer base builds), but it remains to be seen whether the trajectory will be at all predictable.
I’m interested in that one, mostly because I like the business model and the potential as the construction business digitizes, and I like that there’s a high short interest and some skepticism about the growth in the near term… but I’d have to research it more and build some faith in the “story” and in the possibility that they can really become dominant in the industry before I could buy shares. If you’ve any familiarity with the company or the industry, or would like to share your insight, feel free to drop your wisdom on us with a comment below. Thanks for reading!
P.S. In case it’s not obvious, there’s not much chance that this company will be riding Tesla’s coattails, at least not specifically or directly. Tesla is a customer of theirs, according to their presentations, but my impression is that the big drivers for Aconex will be general industry uptake of their software, replacing mostly homegrown systems used by contractors and engineering firms, and, perhaps more importantly, substantial increases in infrastructure spending and major projects like highway systems and airports and energy installations, particularly in the US and Europe. I would expect that big enterprise agreements with major customers like Fluor and Aecom are probably more important than their participation in any one project like a Tesla factory.