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In my final look at unknown micro-cap champions – for the time being – I go inside two companies operating in businesses that very few investors will know about. But with a bit of effort, you can start to get an appreciation of the growth prospects available to this kind of company.
Market capitalisation: $81 million
12-month total return: –33.7%
3-year total return: 26.6% a year
Analysts’ consensus target price: n/a
Successful investment often means noticing what’s going on around you, as Peter Lynch of the Magellan Fund fame, maintained – Lynch always stressed that was one of the best ways to pick up powerful trends. If so, you may have noticed that young people spend a lot of time on their smartphone screens.
Much of the time, they are playing games on mobile apps. Research firm Data.ai says that 60% of the world’s game-playing activity is done on mobile apps, and the mobile gaming market will top US$136 billion ($203 billion) in 2022. The secret to mobile’s growth is that it has “enabled the complete democratization of gaming,” says Data.ai.
As Web 3.0 – the new blockchain-enabled iteration of the internet, incorporating concepts such as decentralisation, blockchain technologies, and token-based “economies” and assets – spreads, gaming is moving on to it at a massive rate. The total addressable market will grow to at least US$200 billion ($298 billion), with three billion “gamers” globally spending an average of seven hours a week playing. Web 3.0 games will enhance users’ gaming experience; allow players anywhere in the world to engage and exchange digital assets and earn profits while playing. Gamers can also improve their skills by using Artificial Intelligence, growing credibility, and solving weaknesses. Web 3.0 will be integrated with the Metaverse – universal and immersive virtual world that is facilitated by the use of virtual reality and augmented reality headsets, and carried over the internet – and the blockchain platform.
It is a potentially massive investment “thematic” – especially in the home of gaming, South-East Asia – but not many investors have their heads around it.
One of the best exposures to this growing global market on the ASX is iCandy Interactive, a game developer that has been listed since 2016. iCandy is the biggest independent game developer in Australia, New Zealand and Southeast Asia with operating bases in Australia, Indonesia, Malaysia, Singapore and Thailand, across which it employs about 650 game developers.
iCandy has had a busy year with a slate of acquisitions that have positioned it very well to become a global games publisher within the fast-growing metaverse and web 3.0 space. In February it made a potentially transformational buy, picking up Malaysia-based Lemon Sky Studios for $44.5 million. Lemon Sky Studios is a video game, game art, and animation studio, having worked on a large portfolio of video games including Call of Duty Infinite Warfare and Marvel’s Avengers. Now that Lemon Sky Studios is fully integrated into the business, iCandy has a full pipeline of contracted services for game production for the next three years.
Additionally, the company acquired majority stakes in game development companies Storms and Gam economy in the March quarter, while in June, ICI staked out a bridgehead in the European market, buying a 60% stake in German game developer Flying Sheep Studios for about $3 million. Flying Sheep founder Thomas Rössig was appointed ICI’s head of Europe. Rössig will manage and provide strategic direction for the ICI team in Europe, while continuing to serve as Flying Sheep Studios’ managing director. ICI says Flying Sheep Studios will significantly augment its software engineering and technology capabilities, in its objectives to develop broad-range metaverse games.
Having brought the financial results of Lemon Sky Studios into the fold, iCandy saw its revenue surge from $900,000 in 1H2021 to $15.7 million in 1H2022. On the back of that huge revenue infusion, iCandy is operationally profitable for the first time ever, recording EBITDA of $4.4 million, after excluding one-off acquisition costs related to the recent acquisitions.
iCandy sees its shares as under-valued, and in July, put its money where its mouth is, announcing a buy-back of up to 135 million shares. As at 31 October 2022, iCandy has bought back 26.75 million shares, and says it remains committed to its buyback scheme.
Mobile app gaming and the extension of gaming into the metaverse is not an easy topic to understand – but iCandy does. I think it looks to be great value at these levels.
Market capitalisation: $46 million
12-month total return: n/a (listed December 2021, at 20 cents a share)
3-year total return: n/a
Analysts’ consensus target price: 35 cents (Stock Doctor/Thomson Reuters, one analyst)
XPON is a marketing technology (martech) and cloud company providing services and software solutions to businesses in Australia, New Zealand, the United Kingdom and Europe. XPON has built an offering of marketing and customer experience technology that enables customers to modernise and streamline their marketing and customer experience capabilities, and use their customer data much more effectively.
XPON has two main platforms, Wondaris and Holoscribe. Wondaris is a customer data platform that centralises customer and marketing data, leveraging AI (artificial intelligence for automated advertising activation, while Holoscribe is XPON’s extended reality (XR) platform for quick and easy publishing XR and 360-degree content. XR is
an umbrella term that covers the spectrum of computer-enhanced reality technology – it encapsulates augmented reality (AR), virtual reality (VR), mixed reality (MR), and everything in between – and lets businesses use technology ranging from simple digital overlays through to fully immersive digital experiences. Together with AI and the internet of things (IoT), XR is considered poised to dramatically enhance both the experiences of customers and the productivity of businesses.
According to PWC: “The impact of this technology (XR) cannot be understated: it promises to change the way we buy things, learn things, and do things. It will intersect with almost every industry and provide value to both consumers and the enterprise.”
Basically, XPON’s technology allows businesses improved access to, and better understanding of, the data captured during their customer’s digital experiences, using analytics, AI and machine learning. The company has created a public cloud-based marketing platform that lets companies unify customer data sets, which were previously “siloed,” spanning things like loyalty programs, email campaigns and point-of-sale data, and runs AI algorithms through the data to determine the propensity of a customer to buy a certain product.
As investors would expect, XPON has a strong relationship with the world’s number one digital advertising platform, the Google Ads platform.
XPON is following the classic path of software companies, spending on customer acquisition costs and re-investing in building the capabilities of the products to drive revenue growth, while working toward profitability. The annual recurring revenue (ARR) number – which shows how much recurring revenue a company can expect, based on its growing yearly subscriptions – is an important one for a business like this, but the “ARR stocks” were hammered around the world over the summer of 2021-22 as interest rates spiked: situations of faraway profitability were suddenly marked-down very severely. But not all such companies are identical, and for the right situation, investors can be prepared to show faith.
XPON’s numbers look fairly good. It has an average monthly customer retention rate of 99.4%, and a current lifetime value per customer of $639,000, versus a customer acquisition cost (CAC) of $57,000. Generally, XPON finds that it makes its CAC back in nine months, per customer. Its total lifetime customer value stood at $136 million as at September 2022.
In the September 2022 quarter, XPON added $1.8 million in ARR to finish Sept 2022 at $18.2 million – which represents growth over the previous quarter of 11%, and 66% growth over the 12 months. Over the 12 months to September, ARR grew by $7.2 million. Quarterly revenue was a record, at $4.3 million, up 44% on a year ago. The gross margin expanded by 3 percentage points to 69%, a 12-month improvement of 7 percentage points.
XPON’s cash balance at the end of the September quarter was $6.9 million. The company said it “remains confident that its current cash position is on-track to drive organic growth and achieve our target of cashflow break-even in FY24.”
XPON has a soundtrack record of growth, and a potentially massive runway of future growth opportunities. According to IT research firm Forest & Sullivan, the total addressable market for customer-facing martech applications in Australia and Europe alone is forecast to be more than $200 billion by 2025.
While IPO subscribers would be disappointed with the way the price has slid from the issue price of 20 cents – and from XPN’s peak price, of 24 cents in January 2022 – I think this is a classic case of how new buyers can take advantage of that.
All prices and analysis at 15 November 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.