The ASX growth story that turned sour – 3 Lessons from Audinate's selloff

In the thick of August reporting season 2023, Audinate (ASX: AD8) kicked off an extraordinary rally that would see its shares surge from $10 to a peak of $23 by March 2024. But fast forward to today, the company has since witnessed a steep 63% decline following two earnings downgrades in three months.

In this piece, we'll be looking at the meteoric rise and fall of Audinate plus what we can learn from its downfall.

The Extraordinary Run

Audinate kicked off its miraculous run in August reporting season, where the company smashed FY23 earnings expectations and upgraded its outlook for FY24. The result delivered some re-rate worthy numbers, including:

• Revenue up 40% to $69.7 million or 7.8% ahead of consensus

• EBITDA of $11 million or 39% ahead of consensus

• Free cash flow of $2.5 million in the second-half of FY23, placing the company in a position to be self funding

• FY24 guidance of "growth in US dollar gross profit consistent with historical performance" implied 26-31% growth vs. 24% consensus

• Backlog remains near record levels

The stock finished the results session up 10.1% and rallied a further 24.3% over the following five days. Interestingly, brokers rushed in to upgrade the stock, with Macquarie raising its target price by 27% to $13.50.

Audinate smashed earnings expectations again in February for its half-year FY24 result. The key numbers include:

• Revenue up 47.7% to $46.6 million or 10% ahead of consensus

• EBITDA of $10.1 million or 6% ahead of consensus

• Gross margin of 71.8% lower than historical 75% due to headwind from backlog release of lower-margin chips

• Positive $3.4 million cash flow in the first half

• Reiterated 26-31% FY24 gross profit and outlined expectations of elevated growth in the second half due to stronger video trajectory, new product releases and overall robust 2024 industry outlook

Audinate price chart with reporting periods in green (Source: TradingView)

Insiders Cash Out

Audinate insiders started to sell at an aggressive clip in March. This included on-market selldowns from:

• Chief Executive Officer Aidan Williams

• Non-Executive Director Tim Finlayson

• Non-Executive Director John Dyson

• Non-Executive Chairman David Krall

Source: Market Index

The timing and volume of these sales marked a departure from historical patterns, where typically only the CEO would sell shares during reporting seasons. If you look at where the transactions took place – They managed to time things pretty well.

Where the directors were selling (Source: TradingView)

Notwithstanding the selldowns and other factors, Audinate's price action was far from bullish. In fact, it was the opposite.

• A bullish stock tends to experience shallow pullbacks that are well supported. Audinate experienced a large 23% pullback between mid-March and mid-April

• After a brief bounce in late April, the stock continued to fall, setting a lower low. By late May, the stock was down 35% from all-time highs.

• Between June and July, the stock traded flat while a tech benchmark like the Nasdaq gained 2.5%

Source: TradingView

The First Downgrade

Audinate reported preliminary FY24 earnings on 6 August, driving a sharp 36.3% one-day selloff. The preliminary numbers missed market expectations but the FY25 outlook was the kicker. The key numbers include:

• FY24 revenue of $91.5 million vs. $94.2 million consensus

• FY24 EBITDA between $19.5-20.5 million vs. $20.5 million consensus

• Drivers of revenue during FY24 are not expected to continue into FY25

• Likely to be a decline in revenue, before a return to anticipated growth and more predictable order patterns in FY26

• FY25 gross profit to be marginally lower year-on-year

The company issued another earnings downgrade on Tuesday, 22 October, flagging:

• Likely to miss previously anticipated marginally lower year-on-year gross profit expectations

• Actively exploring M&A opportunities to accelerate growth plans in video and cloud

• Expects to return to normal order patterns in FY26

Audinate shares finished the session down 6.0%.

Source: TradingView

Lessons Learnt

From watching this hero to zero episode. I've learnt a few things.

Trust the price: In the end of the day, price is the only thing that pays and may signal underlying issues before the official news breaks out. The unusual depth of pullbacks and weak recoveries served as early warning signs.

Look at insiders: The price/technical weakness was further compounded by the high volume and breadth of insider selling.