This was an email I received from Intelligent Investor...John...

This was an email I received from Intelligent Investor...

John Addis FOUNDER & EDITOR
This fortnight, we’re covering Audinate, which was up 20% on Monday and has risen by over 600% since we first recommended it as a speculative buy in 2018. It poses an interesting question - do you hang on to your big winners in the hope they’ll become even bigger or buy more? Audinate is developing a burgeoning global monopoly that produced a truly stunning result. We’re hanging in there. Read more below.

Audinate: the end of cables & the start of SaaS
Gaurav SodhiDEPUTY HEAD OF RESEARCH
If you're not an AV professional, you might not appreciate the difference between analog and digital AV systems. Before recommending Audinate as a speculative buy in March 2018 at a price of $2.70, neither did we.

Audinate set sail in 2003 with funding from CSIRO to develop Dante, its digital protocol for installed audio-visual (AV) systems. The aim was to eliminate cable spaghetti and take audio into the digital age. The promise was a lucrative global monopoly. It may have taken five years but the latest result suggests the company is on track to surpass our expectations.

The most intriguing part of Audinate’s result wasn’t the stunning revenue growth, the fat gross margins or the growing cash flow – although each was impressive. The announcement that a new software as a service (SaaS) product, Dante Director, would soon launch sent the share price up 20% on the day.

Until now, Audinate has been content to dominate the digital audio-visual market. Its main product, Dante, is a protocol (a combination of chipset and software) that allows audio-visual hardware to communicate. Large networks can now be set up wirelessly and controlled by software, ending the reign of cable.

It makes sense for one protocol to dominate the industry to maximise the number of connections. This is already happening. Audinate has 12 times as many devices using Dante as its nearest competitor and, supported by over 400 brands, hundreds of thousands of industry professionals are being trained on it.

Whilst Audinate’s revenue currently comes from original equipment manufacturers installing the Dante chipset, the business is building a more advanced software suite to manage and manipulate those networks. This introduces the prospect of high quality, high margin, recurring revenues and strengthens its competitive position. Revenues will continue to grow with new device penetration, but as the pool of devices grows, so does the usefulness of the new software suite.

Transformation underway
Audinate is transforming from a protocol owner to a platform that generates revenue from product sales and software. Each of those markets reinforces the other; the more devices exist, the more networks can be managed by software. The more networks, the more devices are required. Audinate’s moat is expanding.

This is exciting and rewarding. Since our first upgrade five years ago, the share price has risen over 600%. The hard part now is figuring out what to do. Operating profits are likely to be about $20m for the full year, a disparagingly small number for a company with a market capitalisation of $1.6bn.

Yet these numbers disguise how profitable this business could be. Audinate is building a monopoly. Revenues could ultimately exceed $1.5bn at gross margins of close to 80% and net margins at over 20%. That sounds outrageous now, but the idea that Audinate would generate $100m in revenues was fanciful five years ago. It should close in on that sum this year.

Profits will take time, but we are willing to be patient. We’re raising our Buy price from $8 to $12 and our Sell from $20 to $30. HOLD.