Take a pass on Sangoma Technologies, Kim Bolton says

Canadian cloud communications company Sangoma Technologies (Sangoma Technologies Stock Quote, Charts, News, Analysts, Financials TSX:STC) has fallen a long way over the past half year, but investors thinking the stock might be a nice bargain at current levels might be better off satisfying their tech stock fix elsewhere, according to portfolio manager Kim Bolton.

“You could buy it here,” says Bolton, president of Black Swan Dexteritas, who spoke on a BNN Bloomberg segment on Wednesday. “The average analyst out there has a 12-month price target of $17.25 and it’s currently trading right around $11. So you could buy it here and maybe down at $10 and maybe down at $9 again.”

“But for us, there are just better opportunities,” he said.

Markham, Ontario-based Sangoma does hardware and software in the communications field with phones, power adaptors and office connectivity products on the hardware side and unified communications (UC) and Communications as a Service (CaaS) solutions on the software side. 

The company has made a number of important moves over the past year, including graduating to the TSX senior board and having its shares listed on the NASDAQ, along with a number of acquisitions, a common theme for Sangoma. Last year, Sangoma bought Star2Star, a Florida-based cloud-native communications company for the mid-market and enterprise levels with over $107 million in annual revenue and $15 million in EBITDA, while more recently they bought managed service provider NetFortis Corp, which has over $50 million in annual revenue.

On the NetFortis purchase, which was announced in March, Sangoma President and CEO Bill Wignall said in a press release, “A critical part of our existing strategy and of our competitive differentiation involves providing customers with the widest set of cloud communications services in our industry, avoiding the need for them to buy five different services from five different vendors. The acquisition of NetFortris further extends that strategy in such a perfectly natural manner.”

Sangoma reported its third quarter fiscal 2022 financials last week, showing sales up 97 per cent to $55.1 million and a net income loss of $6.8 million compared to a loss of $1.8 million a year earlier. (All figures are in US dollars except where noted otherwise.)

Management said although revenue in its Product segment was flat quarter-on-quarter, supply chain issues have been proving very challenging. The NetFortris integration led to an increase in the company’s full 2022 revenue projections, which management has set at between $230 and $232 million (previously between $215 and $219 million), along with a call for fiscal 2022 adjusted EBITDA between $42 and $44 million.

Sangoma had been a strong performer over the years, going from about C$5 per share in 2018 to C$17 by early 2020. From there the stock took off after the initial market-wide, pandemic-induced downturn, with STC hitting a high of C$36.40 by February of last year. 

But since then, the journey has been mostly downhill, with Sangoma sliding back to now the C$10-C$11 range.

For Bolton, the big pullback isn’t enough to get him to buy STC.

“It’s indicative of the marketplace, certainly, in the Software-as-a-Service side. Sangoma, they deliver cloud-based Communications-as-a-Service solutions for companies out there, and one of their business units is a group called us Switchvox, which is a business phone system,” Bolton said.

“It has a market cap of about a quarter billion dollars and it’s trading right around C$11.00,” he said. “So, do we like it? No, we don’t own it, and we’re sort of neutral on it.”

Sangoma said it finished its fiscal third quarter with a cash balance of $16.2 million, with $5.1 million in adjusted cash flow over the quarter.