Why I Think Audinate (ASX:AD8) Is A Small-Cap Adaptive Enabler

One of the best adaptive enablers on the ASX in my view is Audinate (ASX:AD8). Audinate provides audio (and now audio visual) chips that allow different components of large audio visual systems to talk to each other through fibre optic cables instead of through copper cables.

First of all, Audinate is clearly an enabler because the end users of a “Dante enabled” system will benefit from increased optionality that it provides. The announcer can decide which area to broadcast to using software; and they can improve, extend and reconfigure the system more easily by ensuring that it is less sensitive to cable length (because signals are travelling as light rather than as sound waves or electrical impulses). On top of that, system designers that use Dante enabled products will have a competitive advantage over those who don’t, since they will be able to use a greater variety of products which will all speak the same language, and save costs because ethernet is cheaper than copper wire cabling.

Audinate is increasingly adaptive as it is included in growing numbers of audio-visual equipment. After all, Audinate is in over 2000 products. The company has proved it can run at break-even while it chases further adaptive strength through expanding into audio visual technology, and has recently raised funds which should allow it to spend more than it earns to accelerate that growth into an adjacent market.

Ultimately, it doesn’t really matter to Audinate which of its clients win in the audiovisual equipment market. As long as they are using their capital and ideas to make products that include Audinate, the company’s business is automatically adaptive to whoever is winning that market. Importantly, once it reaches full penetration of the audio equipment market, any new disruptive entrant is likely to have to include their chips just to get a foot in the door. At that point it’s easy to imagine the company having much larger revenues than it does at present.

Because Audinate is an adaptive enabler, logic suggests it will be around, probably growing, for a very long time. That makes time the friend of its shareholders, even if it doesn’t seem cheap on a multiple of earnings or free cash flow.

Audinate hasn’t yet been included in the ASX 200, having only recently made it into the top 300. However, it currently only has 6 analysts covering it according to S&P Capital IQ, and I think that if it continues to execute on its business then the company will show improving financials, and gain plenty more attention.  So I think that Audinate deserves its spot as one of my high conviction ‘A Team’ stocks. I think that the share price is currently stagnant because the company raised capital, thus satisfying those funds who wanted in. While this is not intended as a recommendation or advice, I think the current price of $7.32 will probably prove rewarding for for a long term investor (and happily hold the stock).

This article is an example of how I think about investing. We are not aware of your circumstances and these articles are in the nature of an investment diary. They are not intended as a recommendation and do not constitute advice.

The article is not financial advice, and should not be the basis for any buy or sell decision. It is general in nature, and our disclaimer is here.