Tucows is my top pick, this investor says

What does the future hold for Tucows (Tucows Stock Quote, Chart, News TSX:TC)? Portfolio Manager Andrey Omelchak says the telco company has tailwinds aplenty in its Internet business, which should propel it for years to come.

Toronto-headquartered Tucows has worn many hats over its more than two decades of existence but the current iteration has the company concentrated on three businesses.

Tucows is the second-biggest domain name registration company in the world after GoDaddy, a not too flashy space to be in anymore but a stable cash generator nonetheless and one that currently provides most of its revenue.

They’ve also got a wireless business called Ting Mobile as well as Ting Internet, a fibre broadband provider now launched in seven locations in the United States. And it’s the Internet business that will grow to play a more central role in the company’s future, according to Omelchak, president and CIO of LionGuard Capital Management, who, speaking on BNN Bloomberg on Thursday, offered Tucows as one of his three Top Picks for the next 12 months.

“On Ting Internet, in this environment everybody wants to have access to a very fast internet connection, and I believe that Tucows is going to see acceleration of deployments for their Ting Internet solution,” said Omelchak.

“Taking us few years into the future, I would not be surprised if Ting Internet accounts for more than half of the value of the company,” he said.

Tucows is carving out a niche in providing fast Internet to small-town USA, a play which may not be the sexiest of spaces but one which will allow Tucows to generate great margins without having to go head-to-head with some of the bigger providers.

“It’s a very high return on invested capital type of investment, which they’re able to capitalize on,” said Omelchak. “And I believe we’re going to see acceleration of the deployments of Ting Internet across United States. Of course, there are some big players in huge cities in the US but the smaller towns are really underserved and Tucows have developed quite an expertise in how to make those deployments and they’re now adding a lot of towns during any given year.”

Tucows has been pretty range-bound over the past three years, aside from a spike in early 2019. So far in 2020, TC is now up one per cent.

Ahead of the company’s second quarter earnings due on August 6, TC last reported on May 7 where their Q1 delivered revenue up six per cent year-over-year to $84.0 million and adjusted EBITDA up a sparkling 34 per cent to $14.1 million with cash flow from operations of $14 million.

“Our Domains business continued to benefit from our focus on high-quality reseller customers, which contributed to more than a 20 per cent year-over-year increase in gross margin in the Wholesale channel,” said Elliot Noss, president and CEO, in a press release.

In May, Tucows announced it would be hiring 50 new employees in software, operations, marketing and customer service, saying, “As self-isolation and social distancing continue, Tucows is leveraging its established virtual workspace infrastructure to operate seamlessly remotely, managing recruitment, on-boarding and training entirely online to connect with talent from all around the world.”