Fallen 70% gross margin tech star ripe for revival
Undiscovered microcap, new CEO in place, divestitures, deleveraging and return to growth — too cheap to ignore at a 20% fw FCF yield.
My initial article on this undiscovered company will be relatively concise as the company reports earnings today after the market closes, and I would like to build a part of the position before that.
Going A-Z on a recent screen, I found a technology business with a high gross margin, low churn, many operational inefficiencies, failed/non-core acquisitions, and still high cash flow from operations. It doesn’t appear on most screeners, as the net income amount is distorted by non-cash expenses, making all financial metrics look terrible.
Now, this is where it gets interesting:
The company has managed to attract an experienced operational CEO who has since put a larger portion of his net worth into the company and options with exercise prices 50-300% higher.
For him, fixing fundamental inefficiencies and propping up the business will be pretty straightforward, while divestitures and new product avenues will drive organic growth.
The company is currently doing buy-backs and deleveraging, and the CEO has a super optimistic outlook in all communication.
I estimate a 100% upside in 1-2 years if initial plans and basic steps are completed (medium-high probability) and a 3-4x upside in 4-5 years if the turnaround is completed successfully.