Why Investors Should Look at TSX/V Small Cap Tech
by Ron Shuttleworth
Canadian publically listed small cap tech companies have, as a group,
outperformed the S&P TSX Index over the past year. Even still, The
Small Cap Tech Group is trading at a historic discount to the S&P TSX
Index based on P/E multiples over the past five years. As a result we
believe that there is more fundamental value in the group because the
earnings discount to the S&P/TSX appears unwarranted.
Recovery in technology spending is forming a solid V-Shape, repeating
a similar pattern to the most recent 2002-2004 technology rebound,
which lasted approximately nine quarters. We are in the third quarter
of a similar, but more fundamentally sound recovery.
Unlike 2002, earnings are more prevalent and balance sheets are
generally more solid. In addition, the macro-economic conditions
appear to be more robust than they were in 2002. A transition from the
fixed web to the mobile web is a fundamental and worldwide catalyst
that could represent a ten-fold increase in connectivity amongst the
The impact of convergence among the mobile web, social web and utility
computing ecosystems could be more profound than the adoption of the
internet itself during the 1990’s.
At M Partners, we have identified several different “ecosystems” that we feel show exceptional potential to produce high growth companies, namely, mobile, healthcare, media, payments, and enterprise SaaS. One of these ecosystems, mobile, involves three juniors listed on the TSX, Redknee (TSX:RKN), Sandvine (TSX:SVC) and Bridgewater Systems (TSX:BWC).
The investment concept is this: mobile operators worldwide are
experiencing a data capacity and congestion crisis that is expected to
get exponentially worse over the coming five years as web enabled
smartphones proliferate the market. Even with significant network
capacity upgrades, operators will continue to run up against capacity
challenges and quality of service issues. Network optimization
solutions will be required to help more efficiently manage how data is
used in order to offset the expenses associated with network upgrades.
With smartphones using 40 times more data than a typical feature
phone, 10 million web enabled smartphones use as much data capacity as 390 million feature phones. According to Cisco, mobile data capacity
requirements are forecasted to grow at a parabolic CAGR of 108% over
the next four years. At the same time, subscriber ARPU is forecasted
to grow at a CAGR of only 10%. As a result, mobile operators will
struggle to grow profitably as they support popular smart phone
devices like iPhone and Android platforms.
Investors can benefit from this problem by participating in the upside
potential of the three software-oriented mobile infrastructure stocks
that I mention in the clip. Often complimentary, sometimes
competitive, each company plays at a different level within the stack
from billing (RKN) to policy (BWC) to network awareness (SVC).
Ron Shuttleworth is Managing Director Razor Capital Partners, Technology Analyst MPartners, and President RES Group. Ron is committed to assisting Canadian technology companies succeed, and to helping investors in Canadian technology companies to maximize their returns. He has been a C-level operator in the software industry, and the small cap technology companies he has covered have raised a combined $300 million and the basket of stocks has returned approximately 35% ROE.
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