Cambium Networks: 55% upside with excellent revenue and earnings growth (NASDAQ: CMBM)

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Investment thesis

Besides its outstanding financial performance, Cambium (CMBM) has a TAM of $22 billion due to increased demand for bandwidth. The company is on the rise with more people working from home, the rollout of 5G, the refresh of the business and the proliferation of broadband. The company’s revenue and earnings are expected to rise, while the current share price is significantly undervalued.

Company overview

Cambium Networks provides wireless communications that work for businesses, communities and cities around the world. Millions of Cambium radios are deployed to connect people, places and things with a unified wireless fabric that spans multiple fixed wireless and Wi-Fi standards and frequencies, all centrally managed through the cloud. Cambium’s multi-gigabit wireless fabric offers a compelling value proposition over traditional fiber optic and alternative wireless solutions. The company works with its Cambium-certified ConnectedPartners to deliver purpose-built networks for service provider, enterprise, industrial, and government connectivity solutions in urban, suburban, and rural environments, with “wireless that simply works.” “.

The investment case

Here are 4 reasons why I think Cambium is extremely undervalued right now and worth considering as an investment.

1. Compared to its peers, Cambium is undervalued by a number of metrics as it outperforms its industry peers in revenue and earnings growth.

  • TTM and FWD P/E GAAP are undervalued by 14% and 17.5% respectively compared to industry peers.
  • FWD PEG Non-GAAP and FWD EV/Sales are undervalued by 19% and 25.5% respectively.
  • TTM and FWD Price/Sales are undervalued by 18.7% and 23.7% respectively.

Source: Alpha Research

At the same time, Cambium’s growth is outpacing that of the industry. Take a look at the table below and you’ll see what I’m referring to here. Revenue growth, EBITDA growth, EPS and operating cash flow growth are all outperformers and are expected to outperform the industry by significant percentages.

Source: Alpha Research

Below is Cambium’s profitability score against its industry peers. EBIT margin, net income margin, ROE, ROC, ROTA, asset turnover rate and net income per employee are all significantly higher in percentage terms than their peers.

Source: Alpha Research

Granted, there are a few areas where Cambium’s metrics could improve, but overall the company is undervalued and/or outperforming its industry peers in efficiently utilizing its assets.

2. Cambium’s leadership is clear on its market strategy and stays on track.

ISPs and midsize businesses are underserved and this is the space Cambium is focused on playing and growing in, with its sweet spot being regional/national wireless ISPs. Its quality-cost structure appeals to medium-sized and smaller companies.

Source: Company Presentation

The company serves a large and diverse customer base that includes mid-size service providers, SME/midsize enterprises, governments and industrials.

Source: Company Presentation

And the company continues its business growth in a TAM of 22 billion dollars. The company has already demonstrated its ability to grow at higher metrics relative to its peers, while it remains severely undervalued by many metrics relative to its peers.

Source: Company Presentation

3. Remote work becomes normal.

Admittedly, not everyone likes remote work. That being said, according to a Gartner survey conducted last summer, 82% of business leaders surveyed said they would allow employees to work remotely from time to time, and 47% said they would allow employees to work remotely all the time.

Source: Gartner

“The COVID-19 pandemic has resulted in a huge, widespread remote work experience,” said Elisabeth Joyce, vice president of the board at Gartner’s HR practice. “As business leaders plan and execute the reopening of their workplaces, they are evaluating more permanent remote work arrangements as a way to meet employee expectations and build more resilient business operations.” (Source: Gartner)

Kate Lister, President of Global workplace analysisstates that “by 2025, some 70% of the workforce will be working remotely at least five days a month”.

COVID has accelerated this inevitable change in the way we work, increasing the market for the products and solutions Cambium offers to its customers. More data shared between remote workers will increase bandwidth demand, and Cambium will benefit.

And take note of this: whether they’re working 9 feet, 9 floors, or 9 miles away, most employees are still communicating remotely with each other, which still requires increased bandwidth as more data is shared than ever before. .

4. Excellent long-term growth potential and industry-leading customer satisfaction.

Estimated revenue growth of 15-17% per year with gross margins of 51-52% will fuel investor interest and Cambium’s share price appreciation.

Source: Company Presentation

Cambium Q1 2021:

  • Record revenue of $88.5 million, up 7% sequentially, up 46% year-over-year.
  • Gross margin of 49.9%*
  • Record operating profit of $13.4 million.
  • Record net earnings of $19.9 million or $0.70 per diluted share.
  • Record adjusted EBITDA of $16.5 million or 18.6% of revenues.

*Cambium’s gross margin was lower in Q1 2021 than it was in 2020 (49.9% in 2021 vs. 50.7% in 2020). According to the company, this was due to the product mix and higher transportation and distribution costs due to component shortages in the market.

Cambium Q2 Outlook:

  • Revenues between 85 and 90 million dollars.
  • Gross margin between 48.8% and 49.8%.
  • OPEX between 32.9 and 33.9 million dollars.
  • Operating profit between $8.6 and $11.0 million.
  • GAAP net income between $6.3 and $8.0 million.

Cambium will release its second quarter financial statements on August 9, 2021.

Cambium financial outlook for 2021:

  • Revenues between $345 and $359 million.
  • Adjusted EBITDA between 15.0% and 17.0%.

Cambium’s NPS is +45, which is excellent. 89% of organizations surveyed are likely to recommend Cambium based on respondents who rated their likelihood of recommending Cambium as 7 or higher on a scale of 0 to 10. Cambium has an average satisfaction rating of 8.5/10. The survey below was conducted by TechValidate with 432 users. Competitors were Aerohive, Cisco, Commscope, Juniper Networks and Ubiquiti Networks.

Source: Company Presentation

Below is a 5-year DCF calculation for Cambium and the current fair value of the company’s stock is $62.87. Based on the 4 reasons I have outlined here and the fact that stocks often exceed their fair value on the way up, I believe Cambium’s stock price will reach the $65.00 level within the next 6 to Next 9 months, a potential increase of 55% over the price at the time of writing.

Source: finbox

What are the risks ?

My analysis of Cambium’s financial outlook does not include the potential impact of any acquisitions, future financial transactions, pending legal matters or other transactions. Therefore, I only include these items in my financial outlook to the extent that they are reasonable; however, actual results may differ materially from the outlook. Please do your own due diligence.

In summary

  • Compared to its peers, Cambium is undervalued by many financial metrics as it outperforms its industry averages in revenue and earnings growth.
  • The management team is clear on the market and the company’s strategy and remains focused on the growth of this market.
  • More companies are moving to remote working and as more employees work this way, the need for bandwidth will continue to increase. This plays to Cambium’s strengths.
  • Cambium’s long-term revenue and earnings growth potential is excellent and the company is a leader in customer satisfaction.