Post by
mrmoribund on Apr 25, 2022 11:32am
Response to v_g and Canaccord
Canaccord is looking vindicated at the moment and v_g, needless to say, is every moment crowing over his apparent triumph. No matter that the overall market (growth stocks in particular) is getting hammered. If v_g can see an opportunity to step into the winner's circle, he'll take it.
I can't say for sure that Canaccord is wrong but I would start by suggesting that their take on Quarterhill ITS is rather one-dimensional. Like v_g, they're looking at EBITDA multiples in a really staticy way. And when Bret Kidd says that there has never been a better time to be in ITS, they essentially are choosing not to believe him.
Let me propose an analogy. In football, when a running back carries the ball, probably about 95% of the time he won't be able to break past the defensive linemen. If he's a great runner he might pick up 4 yards instead of 2. But he won't break free from that first line of defense.
But every once in a while, maybe 5% of runs, maybe 15% for a superstar, he really will manage to run in the open field--and maybe, say, pick up 15 yards. And running backs live for that moment.
Corporations live for that moment also. Most companies have to wrestle with relentless competition (and the tight margins that go with it) and they have to, in a sense, grind out every sale. Only rarely will you see the pure form of running in the open field--a tech product or a patented drug that is a true monopoly product that many buyers want or need.
Markets tend to go wild over even a limited form of what I'm calling corporate running in the open field, what we also call a hot growth story. Even with the current pullback you can find plenty of tech names out there selling at 10x revenues--which would be discounting one Hades of a lot of growth.
With that in mind I'd suggest a side-by-side look at Quarterhill and Ottawa-based Kinaxis. Kinaxis, like Quarterhill, appears to be benefitting from strong tailwinds. Kinaxis sells supply chain management enterprise software. As with Quarterhill ITS, they tend to sign big contracts and those contracts tend to be not cheap to service properly.
When you look at the income statements of the two companies they're not that different. Kanaxis is a little bigger. I'd say their numbers look like where Quarterhill ITS's could easily be two years from now. Kinaxis is running at C$320 million in sales vs. roughly C$200 million at Quarterhill. Both have decent EBITDA margins but are losing money on an earnings basis.
But the difference in the market's valuation of these two companies is jaw-dropping. Even after the drop of the past few days, Kinaxis is trading at 12x sales per share vs a little over 1x sales per share at Quarterhill ex-Wilan. (If you adjust for likely Wilan sale proceeds then Quarterhill is really selling at less than 1x sales.) Kinaxis is selling at roughly 9x book value per share vs. Quarterhill at roughly 1x.
Essentially, the market has accepted Kinaxis as a bankable growth story but has chosen not (yet) to see Quarterhill in even close to the same light.
Don't get me wrong. Quarterhill still has to prove itself. But who has the greater growth prospects (independent of what they think on Twitter) between Kinaxis and Quarterhill ITS? It looks very much to me like a toss-up.
The possibility of Quarterhill eventually flip-flopping in terms of the market's perception (as Kinaxis did years ago) is very real. Of course the one thing that never changes about the market is change itself.
Canaccord and v_g essentially dismiss this kind of narrative out of hand. So too with the market right now. My take is that unless you think Bret Kidd is either lying or misguided on Quarterhill's prospects (or tailwinds) then Quarterhill must currently be one tremendous opportunity.
It the growth part of the market keeps crashing then for sure Quarterhill may continue to fall with it. But investors will always keep coming back in their yearning after compelling stories of growth.