We’ve covered quite a few teaser pitches from Jim Fink at Roadrunner Stocks over the past few years, including a few weak performers and a few very good ones (not so different from most folks), and this one caught our eye this week with the specific prediction that the “secret stock” will triple your money in the next two years. Particularly since he tosses out some of the phrases that really act as Pavlovian triggers for investors, like “Is This the Next Peter Lunch-Style ’10-Bagger’?”
At first, I thought he was still teasing the same stock he’d been riding since December as his “if you buy only one stock in 2015” idea that he called the “best tech stock under $6 (and then, later, “under $8”), and I was going to check up on that because that company was actually acquired pretty recently at probably close to the average price during the times Fink teased it heavily (that was Silicon Image, by the way, my older article on the tease is here… it was bought by Lattice Semiconductor for $7.30 per share).
But no, he’s got a different idea this time… ready for the excitement?
First, the big picture promise — here’s an excerpt to give you an idea of where he’s going…
“Unstoppable Profits from the ‘Silicon Squeeze’
“Here’s why this invisible ‘traffic jam’ is about to set off a $100 billion battle to control the Internet…
“I’ll tell you how to get in on the ground floor and triple your money in the next 24 months….
“You’ve probably heard of the Internet of Things. It’s the idea that, sooner or later, everything—from your toothbrush to your coffeepot to your watch—will be connected to the Internet.
“Today, there are 7 billion devices online. By 2018, that number will rise to 20 billion. And by 2020, there will be 50 billion devices connected to the Internet of Things….
“The Invisible Traffic Jam in Your Living RoomAre you getting our free Daily Update
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“This new Silicon Squeeze won’t be a problem for the massive fiber-optic lines that from the backbone of the Internet.
“But it’s a disaster for the copper cables that connect the Internet to your home.
“You see, those cables can only handle around 10 megabytes of data per second….
“The new Silicon Squeeze will simply overwhelm existing cable networks. The result? A massive “traffic jam” of data—and glacial Internet speeds that will make you long for the days of dial-up….
“The good news: There’s a simple solution to this invisible traffic jam. It’s called fiber-to-the-home, or FTH for short.
“Unlike conventional cable, fiber-to-the-home doesn’t rely on outdated copper wire. Instead, it connects your home directly to the Internet with cutting-edge fiber-optics.”
OK, so that’s the big idea — and it’s one we’ve heard before, and it carries the ring of truth: “Internet of Things” means “more data”… and “more data” means “more congestion,” particularly since we’re also seeing huge demand for bandwidth from increasing video streaming and cloud computing and lots of other high-impact trends.
That drives a lot of things, from demand for storage and distributed access and content delivery networks to demand for more fiber connections to better technologies for compressing and sending data faster, and there are investable ideas for most of those strategies… but he’s got something much more specific to tease: a company that profits from the buildout of “fiber to the home.”
The basic idea is that we can solve most of these problems if there’s dramatically higher bandwidth going directly into your home (replacing your garden hose of bandwidth with a firehose of data into your home WiFi network, which is connecting your phone and your computer and your printer and your refrigerator and your thermostat and your television and your solar panels and… well, you get the idea).
And though it’s still pretty early days yet, with most folks nowhere near getting a “fiber to the home” connection unless they’re in one of the test communities where Google’s pushing their Google Fiber (like Kansas City, Austin or a few others) or live in an area where Verizon is investing in FiOS expansion, there seems to be a pretty solid consensus that we’ll see more fiber extension in the years to come.
So… which fiber stock is Fink teasing here? Let’s check out the specific clues…
“To stay competitive, Big Cable has to enter the Fiber Wars—and soon. Comcast, Time Warner and Cox could spend billions to upgrade their networks. Verizon will have to revamp their FiOS program and roll it out in even more cities.
“With so much money pouring into the market, I expect the coming fiber wars to get ugly—and fast. And that’s great news for investors. Especially if you go for the kind of pick-and-shovel play I’m going to tell you about….
“The Only Pick-and-Shovel Play You Need Now
“The market for fiber-to-the-home is huge. But it’s not huge for every player. So how do you pick the right horse? ….
“with this stock it doesn’t matter who wins the battle for your living room. It could be Comcast, Google, AT&T or some new player. But whoever comes out on top, this special pick will still make money.
“So what makes this pick-and-shovel play so special? Well, there are actually three reasons.
“First, this company builds special optical components specifically for fiber-to-the-home networks. But that’s not what really sets it apart from the crowd.
“No, what makes this company unique is that they don’t just manufacture single components. They design them, too. And they can create customized build-to-suit solutions for every single customer! ….
“Second, this company has rock-solid management. They’ve been in business for two decades. And they have a recognized record of success in the industry.
“In 2012, analysts ranked this tiny firm #1 in the optical component sector. And last year, the firm made Forbes’ 100 Best Companies list—for the third year in a row…..
“… third and final reason I’m such a fan of this pick-and-shovel company: It has absolutely stellar financials….
“In 2012, this fiber-optic firm’s gross revenues were $47 million. In 2013, they rose to over $70 million. And last year, revenues hit $86 million….
“During a recent conference call, the CEO stated that Q1 2015 revenues hit $21.7 million—beating analyst estimates.
“On top of that, he predicted the Q2 revenues will beat projections, too. Analysts expect sales of about $22.4 million. But the CEO confidently predicts closing out Q2 with revenues of up to $24.5 million.
“… since 2007, revenues have grown by an average of 45% per year….
“Just three years ago, profit margins were 34%.
“Last year, they rose to 38%.
“And in 2014, this fiber-optic power play enjoyed profit margins of 40%”
So, plenty of clues — shall we pause for a moment so you can play along at home? What does your cogitationizing tell you about this secret stock?
We’ll just hum along with the elevator music here…
OK, now add on that he says the company has $63 million in cash, “recently” traded at a “criminally undervalued” EV to EBITDA ratio of 7.65 — and Fink says he told his shareholders to “buy big” back then — and that it was trading at $10 a share “just 12 months ago.”
So who is it? Thinkolator sez they’re teasing: Alliance Fiber Optic Products (AFOP)
AFOP is a perfect match for most of the numbers, though Fink’s copywriter interprets some of them a bit differently than I do — many of those “hint” numbers are in the last quarterly press release that they shared, which did indeed promise that sequential revenue growth will continue. They have had three years of very good revenue growth — though you have to interpret “average” very differently than I do to say they’ve grown revenues by an average of 45% per year for seven years (the compound annual growth rate in revenues for AFOP from 2007-2014 is actually more like 15% — though they have had a couple 50-60% years along the way).
Alliance Fiber Optic does indeed do its own manufacturing, in Taiwan and China as well as in the US, so they do offer some flexibility and customization, but they essentially sell the cables and switches for fiber optic networks — both the dropdown stuff to individual premises as well as the switches, splitters and connections used throughout the systems.
Is their product unique? On that, I have no idea — they have been around for almost 20 years now, with up and down performance, but presumably the big move their stock has had over the last several years (along with big increases in revenue) has been largely due to increased investment in fiber optic networks and “fiber to the home” investments with FiOS and Google Fiber. Presumably some of the dips in the stock were associated with the times when Verizon halted their FiOS rollout and investment plans, as they’ve chattered about a few times (just this year they’ve basically said they’re on hold until FiOS makes back some of the capex they’ve poured into it, but if Google or other tech competitors keep pushing that rollout will probably restart).
It’s very, very expensive to build big networks, whether cable or telephone or fiber optic, which is why the cable companies have been such fantastic monopolies — no one wants to pour that money into competing against them. Google is trying to inspire others to compete, they almost certainly don’t really want to invest a couple hundred billion into wiring the whole country for Google Fiber, but it remains to be seen who will step up, what the regulatory framework will be, and who will absorb the costs of bringing US broadband speeds up to the standards of, say, Korea. At this point, from the record of both Google Fiber and Verizon FiOS, it sounds like the average cost per household to bring someone onto a fiber optic network is somewhere in the $700-1,000 neighborhood, so it takes a lot of years of HBO and ESPN markups to earn back your investment.
Google so far is pushing into at least a few more cities following the Kansas City experiment, so although I’m almost certainly not ever going to have direct fiber to my home I will cheer the developments as they come… and several more cities does mean a larger market for connectors and splitters and all the other equipment those installers will need to hook up the people of Austin, Provo, Atlanta, Charlotte or the few other cities making it onto the Google list. So we do still seem to be in a period of possible revenue increases, particularly since Google is at least rumored to be AFOP’s biggest customer — though it’s not clear whether that’s because of Google Fiber, or because of Google’s consistent and strong push for building out new data centers (fiber connections in data centers are also a continuing large area of potential growth for some fiber equipment).
That’s about all I know about AFOP — an investment here is all about growth, and most of that is not really clear even to the analysts, they forecast that AFOP will grow earnings per share by 25% a year over the next five years, making the stock quite cheap at about 15X forward earnings… but they also expect earnings to be essentially flat in 2015, and up only about 10% in 2016, so I’m not sure quite where that growth is coming from or when they expect it to hit.
You see that fairly often with these growth estimates from analysts — the five year average growth expectations can be massive, because that’s just a big picture number and you think the sector will grow fast at some point and everyone kind of knows that you’re just making stuff up when it comes to five-year forecasts. But when it comes down to actual companies, looking at numbers and making a forecast that your boss is going to be comparing to real numbers next year, they are often much more circumspect — the average estimate for 2015 is for earnings of $1.19 a share, followed by $1.31 in 2016. That’s after $1.17 in 2014 — so yes growing, but not growing very fast right this very moment. Unless the analysts are just wildly underestimating the potential, which is possible.
The ownership structure is a bit unusual, though not shockingly so for a small cap stock (market cap is still under $400 million) — there’s one large institutional owner who owns more than 10%, and the CEO owns about 10%, but overall institutional and mutual fund ownership is very low. With this kind of small company, with large insider positions, I’d much rather see some insider buying to validate that they do indeed have spend-happy customers and a big growth trend ahead — but that’s not the case here, there’s been not a single insider purchase in two years, and lots of insider selling. That doesn’t mean anything in itself, they have pretty generous stock-based compensation so in many ways company insiders are going to consider their shares their salary, and you can’t spend shares on a new pool or boat or the kids’ college tuition… but I’d be a lot more comfortable, given my lack of insider knowledge about the industry, if the insiders were buying.
So that’s it for me — any thoughts about AFOP? Interested in this potential “Roadrunner” idea teased by Jim Fink? Let us know with a comment below.
Disclosure time: I need to note that I own shares of both Google (GOOG and GOOGL) and Verizon (VZ). I don’t own any of the other stocks mentioned, and won’t trade in any stock covered for at least three days after publication per my trading rules.