Absolute Software (ALSWF): Strong Buy
Business: Lo-Jack for Laptops laptop security and recovery product
Shares out(mm): 47
Stock Price: 11.09
Mkt Cap (mm): $521
Rationale:
This is a high-growth company with a recognized product, protection from competition (patents and network effects), and hard to understand accounting.
LoJack for Laptops is a subscription service like virus protection. According to company reports, most subscription-related expenses occur upon initiation. Although customers pay in advance, revenue is deferred to the period when the service is provided. Since subscription expenses are greater than revenue in the initial period, the better the company does, the worse net income is going to look. There have been a couple of quarters where net has been more negative than expected because subscription growth was greater than expected. The stock has fallen, which indicates to me misunderstanding by the market and a profit opportunity. Subscription growth and operating cash flow(OCF) are probably better indicators of company performance than net.
The company has a goal of 4 million subscribers by June 2009, which RBC thinks is conservative. Split adjusted OCF was .19 in 1Q08 (July – Sep. 2007) and RBC is forecasting .63 for 2008 or OCF/earnings of 17. This is versus OCF growth forecasts of 66% and 30% for this and the next fiscal years (RBC).
References:
Company Reports
