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Inseego Has Tripled, But It’s Still Undervalued

We might be overdoing it a bit writing yet another article on Inseego (INSG), which is the top-performing stock in our SHU portfolio (we bought it for $1.52 16 months ago).

But we think we can be forgiven because the shares still present a very good opportunity, even if the shares have more than tripled from the levels at which we bought them. In fact, the shares have consolidated quite a bit lately - they were as high as $6 just a couple of weeks ago:

We think the shares have three very big opportunities (management has argued that the first two are $1 billion revenue opportunities each):

  • 5G fixed and mobile hotspot, routers and gateway business
  • Ctrack fleet management and, more especially, their aviation segment
  • DMS (Device Management Systems), which is used to track mobile assets (phones, laptops, etc.) for clients' employees

The company's 5G business is set to take off, helped by several factors:

  • 5G is a cable replacement business, making it several times bigger than the company's 4G business.
  • Chinese competition (Huawei, ZTE) is in effect locked out of the market.

Inseego has already won several contracts, most notably with Verizon (VZ), but there is considerably more (from company PR):

Inseego has been selected by a major Asia-Pacific service provider to bring its 5G NR network to life with Inseego’s revolutionary 5G Home Router. This new customer joins an extensive list of Tier One global operators that have been working with Inseego to make fixed and mobile wireless 5G real for millions of their customers in 2019.

We think this opportunity will far outstrip its previous 3G and 4G waves, as the latter weren't really a competitor for cable, so the market for 4G routers and hotspots was fairly limited. In contrast, 5G really is a competitor to cable and even fiber to the home, giving Inseego's routers and hotspots an enormous potential market, a multiple of the previous 3G and 4G ones.

We have explained this in greater detail in previous articles. What we want to concentrate here is the company's telematics business, as a recent deal in the sector highlights our belief that it is considerably undervalued.

Its DMS business with partners T-Mobile (TMUS) and Sprint (S) was traditionally focused on the public sector but is now also addressing the enterprise market, expanding the company's addressable market by 5x-10x. This is part of its Enterprise SaaS business segment.

Telematics

A little memory refresher, from the Q2CC (our emphasis):

The Aviation vertical is progressing with triple digit unit growth, new customer wins and continued expansion of backlog and customer pipeline. We have new Aviation customers in the UK and EMEA, including a global logistics player at the Brussels International Airport. Once again, I want to remind everyone this is a high growth market, which we believe is another $1 billion revenue opportunity for Inseego. It is in a nascent stage. SaaS subscription businesses with long- term contracts spread the revenue recognition over the life of the contract. GAAP governs this, so it takes time to translate into sales growth numbers.

With DMS suddenly having a 5x-10x larger addressable market and one C-track segment (aviation) constituting a $1 billion revenue opportunity alone, it is perhaps worthwhile to consider what this business might be worth. Consider the following recent deal (from TomTom):

Location technology specialist TomTom (TOM2) today announced the sale of its Telematics business to Bridgestone Europe NV/SA (“Bridgestone”), a subsidiary of Bridgestone Corporation in EMEA, for a purchase price of €910 million, and proposes to return the majority of the proceeds to its shareholders.

That €910 million is what Bridgestone is paying in SaaS revenues? We take the following data from TomTom:

  • Q3 SaaS revenues were €34.6 million, so that's a little under €140 million a year in subscription revenue.
  • Q3 hardware revenues were €8.8 million, so that's €35 million a year in hardware revenue.
  • If you value the hardware at 1x sales, we have €875 million/€140 million = 6.25x sales. Inseego's SaaS revenue was $16 million in Q3 (and plagued by $2 million in currency headwinds), so that's $64 million a year.

    At 6.25x sales, that's a $400 million valuation for its SaaS business alone, more than the whole market cap of the company ($366 million), which includes its 5G business and IoT business. You get those for free.

    But DMS is growing rapidly, and so is its C-track aviation segment. From the Q3CC (our emphasis):

    The number of design wins so far this year has been nothing sort of phenomenal with 5 new top-tier service providers, 8 new product design wins and 5 new aviation customers.

    You might also want to read that quote from the Q2CC again which we posted above, where it mentioned triple-digit unit growth. In addition, you have to realize the following (from the Q2CC):

    SaaS subscription businesses with long- term contracts spread the revenue recognition over the life of the contract. GAAP governs this, so it takes time to translate into sales growth numbers. We are exercising patience while we continue to grow the customer pipeline.

    That is, little of that triple-digit unit growth is (yet) translating in revenue growth, but it's coming. You might wonder whether that 6.25x sales is an outlier in terms of valuation for acquisitions in the sector. Well, here are some other deals:

    • Verizon bought Fleetmatics (FLTX) for $2.4 billion when it was doing $300 million in revenue; i.e., it paid 8x sales.
    • Michelin bought NexTraq (FLT) for $320 million when the company was doing 48 million in revenue, which amounts to around 6.5x revenues.
    • Verizon bought Hughes Telematics in 2012 for $612 million, or 8.3x revenue.

    While there have been cheaper deals, given the growth and attractiveness of Inseego's aviation segment in particular, we think any acquisition would value the company's SaaS business at the high end.

    Conclusion

    The first part of the run in shares of Inseego was on the basis of restructuring and turning its finances around. The company is now on the verge of several very big opportunities, most notably its 5G business and its aviation segment.

    Inseego's 5G business is about to take off this year, as 5G's early market (fixed wireless replacing cable and mobile hotspots) is exactly where the company sells. While its SaaS business is still small, two main components (DMS and the aviation segment) are growing fast already, but much of this is happening out of sight and has yet to show up in revenue numbers.

    Acquisition deals in the sector show that the company's SaaS business alone exceeds the market cap. Given the growth profile, we think something has to give and that something is likely to be the share price.

    While we are already fully loaded up in the SHU portfolio, investors can profit from the recent consolidation to do the same.

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