Why Audinate is the new earnings powerhouse among ASX tech stocks

To this day, I still have only a vague idea of what Audinate (ASX: AD8) does – it provides a specific audio-technology-related product for a very niche industry. But what I do know, is that the company has a strong, upward-trending share price and recently smashed first-half earnings expectations.

Its share price performance and earnings trajectory mean AD8 deserves to play in the big leagues alongside household tech names such as Megaport (ASX: MP1), Altium (ASX: ALU) and NextDC (ASX: NXT).

Audinate explained

Audinate's main technology is called Dante, which replaces complex physical connections with standard computer networks, allowing audio and video transmission over Ethernet cables. This simplifies setup, offers more flexibility and lowers costs.

Dante is used in various professional audio-visual settings such as live sound, broadcasting, recording studios, and commercial installations.

Audinate also offers hardware and software tools for manufacturers to integrate Dante into their products as well as Dante certification programs, Dante adapters and Dante management services.

First-half FY24 – Key numbers

• Revenue of $46.6 million, up 51%

• EBITDA of $10.1 million, up 134.9%

• Net profit of $4.7 million compared to $0.4 million loss a year ago

• Operating cash flow of $11.8 million

• Cash and term deposits balance of $111.7 million

The revenue and net profit figures were 9.4% and 74%, respectively, ahead of Macquarie's forecasts.

In terms of outlook, Audinate said the full year remains consistent with statements made at the release of its FY23 results. This included: "We expect that Audinate will double revenue in the medium term," and management anticipates achieving this ambitious goal in FY24.

Earnings call highlights

• Chip shortages in 2022-23 resulted in a substantial pull forward in design wins. Despite slowing growth concerns, management said the number of new customers designing products is increasing

• The new Dante Connect product could make a meaningful revenue contribution in time. There isn't much market data on this product yet

• There are mixed signals about potential softening macro starting to impact the AV industry. Data from two to three months ago showed there was softening in the US market. But that did not live up to expectations

• Headcount rose 15%, with another 10-12 roles planned

• Improved supply chains will result in shorter lead times for customers.

Analyst takeaways

Audinate's guidance suggests a potential decrease in gross profit in the second half of FY24. But several analysts pointed to leading indicators suggesting momentum in video performance remains on course.

Analysts views were near-universally positive and pointed to further tailwinds such as a growing backlog for Ultimo, Brooklyn and Viper boards to be worked through in 2H24 and FY25. The boards are all part of the Dante Brooklyn family of audio networking products, designed for different applications (e.g. supports different channels and Hz sample rates).

UBS analysts view the company as having one of the deepest competitive moats across coverage, structural tailwinds offer strong decade-long growth.

The average target price across six sell-side ratings was hiked by 21% to $19.29 (Audinate closed at $19.27 on Tuesday).

Time for a breather?

There's no denying that Audinate is a little overextended after running almost 30% in the last four sessions. What tends to happen after an earnings beat (and subsequent share price rally) is a period of consolidation.

The stock traded sideways for about three months after its February 2023 reporting season rally as well as another three months of sideways action after its August 2023 reporting season surge.

Audniate price chart (Source: TradingView)