Tucows has a 63 per cent upside, says Echelon Wealth

Look for EBITDA margins to trend higher over the longer term for Tucows (Tucows Stock Quote, Chart, News TSX:TC), says analyst Gianluca Tucci of Echelon Wealth Partners, who on Wednesday reiterated his “Buy” rating and C$100.00 target price on the stock.

Internet services company Tucows reported its second quarter 2019 results on Wednesday, showing for the period ended June 30, 2019, net revenue of $84.1 million, adjusted EBITDA of $11.5 million and EPS of $0.24 per share. (All figures in US dollars unless noted otherwise.)

Tucows’ top line was up four per cent year-over-year, while EBITDA rose by three per cent. In the accompanying press release, President and CEO Elliot Noss highlighted the quarter’s strong cash flows which are being put to use in the company’s long-term strategy in building out its Ting Internet service.

“The second quarter saw continued steady progress at Ting Internet, marked by our best quarter ever in terms of new subscribers, continued expansion in the number of serviceable addresses, and our highest ever level of capital expenditure as we continue to build out the network for the long-term growth of the business,” wrote Noss.

In a corporate update to clients, Tucci noted that TC beat both his revenue and adjusted EBITDA estimates ($81.1 million and $10.2 million, respectively), numbers which reflected his recently tamed expectations for the quarter. The analyst said that he was pleased with the advancement in the company’s fibre business, with Ting Internet currently standing at 8,800 customers and 33,500 homes. Tucci noted that Tucows’ Q2 was its strongest ever for customer adds for Ting Internet which is currently live in six cities in the US.

Tucows is spending money now to ensure its future, Tucci says…

Tucci says Tucows’ initiatives in fibre are costly but they provide a robust risk/reward.

“We continue to believe the next major growth catalyst for TC lies in its fibre business. Today’s 8,800 fibre customers add roughly $8.8 million in run-rate gross profit. We believe we could see fibre customers and homes passed of approximately 10-15K and 40-50K, 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 4.5K/16.0K and 7.0K/28.1K, 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,” writes Tucci.

The analyst thinks that Tucows will generate fiscal 2019 total revenue and adjusted EBITDA of $346.0 million and $50.1 million, respectively, and fiscal 2020 revenue and adjusted EBITDA of $341.7 million and $47.1 million, respectively.

Earlier this year, Tucows announced the acquisition of Denmark-based wholesale domain name registrar Ascio Technologies, a $29.44-million transaction that Tucci calls a competitive bid. The analyst says that there are obvious technological synergies through Ascio along with room for expansion post-integration.

Tucows has had an up-and-down first half of 2019, currently trading down 23 per cent year-to-date. Tucci’s C$100.00 target represents a projected 12-month return of 63 per cent at the time of publication.