The Tucows selloff is overdone, says Echelon Wealth

The recent selloff in internet services company Tucows (Tucows Stock Quote, Chart TSX:TC) has been overdone, according to Echelon Wealth Partners analyst Gianluca Tucci, who in an update to clients on Tuesday upgraded his rating from “Hold” to “Buy” while maintaining his price target of C$125.00 per share, which represented a projected return of 53 per cent at the time of publication.

Tucows’ share price had been on the upswing since early November 2018, rising from C$65.89 on November 6 to C$119.19 by April 3. But a poorly received quarterly report on May 8 caused a significant drop-off, such that the stock closed last Friday at C$86.06.

In its Q1, 2019, TC reported revenue of $79.0 million, Adjusted EBITDA of $9.4 million and EPS of $0.26 per share. By contrast, Tucci had called for $82.7 million, $10.4 million and $0.30 per share. (All figures in US dollars unless noted otherwise.)

But Tucci claims the miss was entirely attributable to the Network Access division (particularly Ting Mobile) which generated $23.3 million in revenue versus his expected $26.4 million, with the company experiencing one of its worst quarters for carrier penalties at Ting, along with a rare decrease in data usage per account. Morevoer, the analyst says that in its Q1 earnings conference call, management reiterated guidance of $62 million in cash EBITDA for 2019 and reiterated 2019 fibre capex guidance of $35 million.

“We continue to believe the next major growth catalyst for TC lies in its fibre business. Today’s 770,00 fibre customers add roughly $7.7 million in run-rate gross profit. We believe we could see fibre customers and homes passed of approximately 10,000-15,000 and 40,000-50,000, respectively, by 2019-end, which would yield $10-15 million in incremental annual run-rate gross profit. For context, fibre customers and homes passed ended 2017 and 2018 at 4,500/16,000 and 7,000/28,100, respectively, showing impressive early stage growth. We believe TC will continue to add strategic Ting towns that fit its profile and grow the addressable opportunity and resulting visibility in its next growth leg of fibre internet access to the home,” says Tucci.

The analyst says the next major growth initiative for TC across the US will be in fibre, where Ting Internet is currently live in six cities with one more to come online in late 2019 and another by early 2020. Tucci claims Tucows’ domain registration business continues to be a cash-generating machine, allowing for the company to have ample funding for Ting Mobile and Ting Internet.

The analyst is maintaining his 2019 forecast, which calls for $363.9 million in revenue and $53.3 million in Adjusted EBITDA. He says the stock is currently trading at an EV/Sales, EV/EBITDA, and P/E of 2.1x/14.1x/31.6x, versus its Domain and Internet comparables average of 8.8x/23.5x/81.6x and 2.5x/7.2x/17.8x, respectively.