The Simple Framework I Use To Find Growth Stocks In Tech
I grew up in a small town, isolated from much of the outside world. We didn’t (and do not to this day) have a single chain restaurant or a single stoplight.
The closest city (population 60,000) is a 2.5-hour drive away. That’s where we had to go for things like dentist appointments and shopping.
In today’s instantaneous and fast-paced world, it’s baffling to think about… My parents would drive more than 5 hours to take me and my younger brother to get our braces checked on… (in a beat-up white single cab 1985 Ford truck with a speedometer that didn’t work, no less.)
My hometown had one school. Barely. Upon entering high school, our school budget was $300,000 in the red. After many town hall meetings, the school board voted to cut a day of school to help close the gap.
While many might gripe that we didn’t have the “best” education or as many opportunities that kids in the city might have, one thing that my parents — and growing up in a small village — taught me is work ethic.
While the first job of many of my peers in cities across America may have been flipping burgers or working at the nearby mall, my first “job” was moving irrigation pipe. I didn’t receive monetary compensation other than food on the table, clothes on my back, and a roof over my head.
Before I got my driver’s license, my dad would drag me out of bed in the morning to our field so I could move irrigation pipe while he worked on one of the tractors, swathers, or bailers that seemed to be always broken down. Then we’d go back in the evening and I’d move the pipe all over again.
While I dreaded moving pipe — and bucking bales — it quietly instilled a few lessons. For instance, if you try and cut corners it’ll end up costing you. Better to get it right the first time. When things go wrong — as they always did — instead of sulking about it, just go fix it. If you didn’t know how to fix it, figure it out.
These days, I consider myself somewhat savvy when it comes to most technology. And I spend a big chunk of my time researching and writing about it. That’s because I think the tech sector hands-down holds some of the best opportunities for growth investors.
I’m talking about areas like the cloud, software-as-a-service (SaaS), online video gaming, artificial intelligence, and more.
However, even I’ll admit that once you get into the finer details, tech can quickly become fuzzy and confusing.
Take your basic home internet for example. You have your Internet Service Provider or ISP, that sends the internet to the modem in your home. Today, many modems are a modem and wi-fi router in one, which means the internet essentially stops there and gets broadcasted throughout your house.
But if your modem acts solely as a modem, then you need a separate device or wi-fi router, to connect to your modem to have wi-fi. If something goes awry, or you’re having trouble connecting one of your devices, whether it be a laptop, smartphone, or smart TV, and you need to dig into your network configuration, this is where it can get rather confusing — and frustrating — for most people.
Now imagine a similar scenario but on a much larger scale, like a business with hundreds or thousands of employees all trying to access the network. Or maybe a college campus, or even a coffee shop that might have multiple modems and routers to provide internet throughout their building or across their campus.
Instead of technicians going from router to router, or modem to modem, what if they could get gain access to the network from a single console? From that single console, they can check the performance, security, and see where the problem might be. Is it in the modem or the router? If so, which one?
How I’m Investing In This Solution
This is the exact solution that Calix (Nasdaq: CALX) delivers to its customers. In industry terms, it’s called a “unified access network,” which integrates wired and wireless components that share network elements and services.
There’s an industry trend toward unified networking as a way to deal with an increasingly mobile workforce accessing corporate networks remotely through a variety of devices. And Calix provides cloud and software platforms, systems, and services to help businesses realize this unified access network.
Calix is a relatively small company ($1.5 billion market cap), but it’s been able to land some big clients, including Verizon Communications, Lumen Technologies, Frontier, Cox Enterprises, and many others.
It had annual sales of $424.3 million last year, and 2020 is shaping up to be even better. Through the first nine months of the year, it’s already produced $371.2 million in revenue, which is already a 22% improvement over the same period a year ago.
This is a small growth company, so it doesn’t consistently produce positive net income. However, in two of the last four quarters, net income has been positive, and it’s on track to post its first profitable year.
What’s more, it’s generated $21 million in cash flow through the first nine months of 2020, which is a massive improvement over the same period a year ago. The company isn’t overleveraged, either. It has enough cash ($104 million) to cover all its debt obligations ($20 million).
Action To Take
The beauty of cloud and software companies is that they can scale their business quickly. And as their business scales, margins — and profits — drastically improve. Software companies have some of the thickest margins out there.
With businesses and organizations realizing the importance of a unified network access platform, Calix’s momentum should continue. Growth investors would be wise to put this one on their watchlist.
The larger point here, though, is that you shouldn’t let yourself be mystified by what’s going on in the tech world. Do yourself a favor and learn about it as best you can. And remember, if you really think about it, you start to realize the best areas for growth in tech all boil down to what we dealt with back on the farm… If there’s something out there that’s not working, you better go fix it.
Find a company that does that, then your chances are pretty good for success.
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