The ASX growth story that turned sour – 3 Lessons from Audinate's selloff
Audinate shares are back to square one after an extraordinary 130% rally between August 2023 and March 2024.
Source: Shutterstock
Mentioned
KEY POINTS
- Audinate shares surged ~130% between August 2023 and March 2024 on the back of strong earnings and guidance upgrades
- The stock crashed 63% from March 2024-to-date after two back-to-back earnings downgrades and a concerning FY25 outlook
- Multiple company directors, including the CEO, made significant share sales in March 2024 near the peak price of $23, preceding the stock's dramatic decline
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
Date | Director | Type | Amount | Price | Value |
|---|---|---|---|---|---|
27/03/24 | Sell | 32,807 | $21.02 | -$689,603 | |
26/03/24 | Sell | 32,807 | $20.70 | -$679,104 | |
25/03/24 | Sell | 32,808 | $21.14 | -$693,561 | |
22/03/24 | Sell | 1,578 | $22.36 | -$35,284 | |
07/03/24 | Sell | 22,998 | $21.65 | -$497,853 | |
07/03/24 | Sell | 5,741 | $21.75 | -$124,894 | |
06/03/24 | Sell | 8,943 | $21.52 | -$192,456 | |
04/03/24 | Sell | 8,059 | $21.75 | -$175,295 | |
04/03/24 | Sell | 25,809 | $21.80 | -$562,716 | |
01/03/24 | Sell | 18,450 | $21.98 | -$405,519 | |
14/02/24 | Sell | 30,000 | $19.51 | -$585,230 |
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.
