Socket Mobile, Inc. (NASDAQ:SCKT) Some of the most interesting companies out there are the ones growth investors leave for dead. As a value guy, I am always on the lookout for a well-ran company, with a value price tag and a growth option. With the market making new highs, seemingly every day, it becomes challenging to find attractive investment opportunities.
An area where I have found value lately is when growth investors irrationally sell a quality company due to lower growth than expected.
Socket Mobile, Inc. (NASDAQ:SCKT) is a prime example of the fed-up growth investor phenomena – leading to an attractive buying opportunity. Back in Q2, the company reported revenue growth of 15.6% on EPS of $0.09/share. Without any prior knowledge on the company, it would seem as if these are respectable numbers. After filing, the stock proceeded to fall 20% or so due to legacy SoMo sales faltering. If you did your research, you would know SoMo sales were expected to be completely gone by 2016 year-end. Apparently, that did not matter to some investors.
On a relative basis, the company began to look even more attractive after the sell-off. For an example, the NASDAQ is trading around 25x earnings with limited to no growth. SCKT stock on the other hand has double digit growth and selling for 10x earnings. The under 10x P/E crowd is basically saying “sell, sell sell this company’. However, the company is in a healthy financial condition (net cash position), is consecutively profitable, growing at a decent clip and recently up-listed to a major exchange.
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Moving forward, the company recently reported Q3 earnings; revenues up 13.3% and EPS of $0.11/share. I wasn’t surprised with these results. The company continues to do what they do best and the profitability continues to improve. After the results were posted, the company promptly shot up around 20% – still below their pre-crash fall but moving up again.
So what exactly does SCKT do? Well, the company is a provider of mobile cordless bar-code scanners. The rise in mPOS, mobility and more efficient technology is a huge tailwind for the company. SCKT is one of the only ones who are in this market – controlling a good chunk of the pie with a first mover status.
Ten or so years ago the company was highly unprofitable and in a totally different industry. However, in 2014 the company recorded their first year of profits. In 2015 the company had a record year of profitability. Moreover, the company has continued to kick-out decent free cash flow, rid the company of warrants, and has a significant amount of NOLs to offset taxable income for years.
Since 2014 management has continued to decease its debt, lowering its overall fixed costs. Interest payments have continued to decrease and cash is finally starting to pile up – currently in a net cash position. Even better, profits have continued to roll in and increase, putting the P/E ratio below 10x. I think a P/E ratio of 10x is pretty decent for a company in a net cash position that is growing. Furthermore, give the company another year of growth and retained earnings and the underlying value should continue to increase. Also, with over $27 million in NOLs, the company has a significant run-way for shielding their taxable income.
In regards for further growth, the company has a few new product coming online in the near-term. One product line is their Durascan barcode scanner. This product is designed for harsh environments such as warehouses and outdoor scanning occupations. There is also a lack of durable scanners in the market. So, when this product is fully online, there will be a whole new revenue stream.
Revenue will continue to increase from the rise in mPOS in small retailers as well. These scanners are more efficient than your typical cash register or other legacy paying unit. As more small retailers transition into a mPOS model there will be a steady increase in scanners. Likewise, as the company’s application partners add storeroom inventory modules, there will be a continual demand for the company’s product. Moreover, the integration work that management has done in the previous years is finally starting to pay off – for both the top and bottom line.
Finally, mobile point of sales demand is being driven in the manufacturing, field service and transportation industry as well. These three industries are emerging growth areas for the company. Even better, smartphones, tablets are becoming more prominent in business applications, giving the company a long run-way for growth. The Durascan product should do well with these industries.
In summary, the company will have a record breaking year for 2016 and 2017 should continue to gain more and more traction. The company is focused on maximizing the opportunities in the smartphone, tablet, and mobile workforce market. As new applications continue to develop, the mPOS workforce will continue to act as a driving tailwind for the company. With a net cash position and P/E under 10x – all supported by attractive growth – SCKT is a rather unique opportunity for growth and value investors alike. For continuing coverage on shares of $SCKT stock, as well as our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!