As artificial intelligence (AI) hype continues to grip the investing world, an age old strategy could provide an excellent investment opportunity – the “picks and shovels” play.
Drawing inspiration from the California Gold Rush, where the true winners were the companies supplying essential tools and services to prospectors, this strategy focuses on investing in the enablers fueling the AI revolution rather than directly betting on the pioneers at the forefront. As AI continues to disrupt industries and reshape the technological space as we know it, the demand for the critical infrastructure, hardware, and services that power this transformative technology has exploded. From semiconductor manufacturers like NVIDIA (NASDAQ: NVDA) and AMD (NASDAQ: AMD) crafting the high-performance chips that train and run AI models to cloud computing giants providing the computational muscle and scalability for AI workloads, these enablers have become indispensable cogs in the AI machine.
Moreover, the labour-intensive process of data labelling and annotation, crucial for training AI algorithms, has given rise to a thriving ecosystem of specialised firms.
We’ve previously discussed investing in energy for innovation as well as the risks of under investment in the space with the immense energy demands of AI having thrust energy companies into the spotlight, positioning them as potential beneficiaries of this computational arms race.
Beyond the global giants, who are some of the AI picks and shovels plays on the ASX?
SCEE Group and the AI Electrification
SCEE Group (ASX: SXE) is an electrical contracting company diversified across the resources, commercial, and infrastructure markets in Australia.
While not directly involved in AI, SCEE Group is well-positioned to benefit from the growing demand for data centres driven by the AI revolution. The group primarily provides electrical contracting services, with a focus on expanding its core competencies and adding complementary capabilities through organic growth and acquisitions. The company has increasing exposure to service and maintenance work, with recurring revenues now accounting for over 40% of its activities. In the last 12 months, SCEE Group’s share price has climbed close to 150%, riding a wave of AI momentum.
The global data centre market is estimated to grow at a compound annual growth rate of 9.6% during the period 2023-2030, driven by the increasing adoption of cloud computing and AI technologies.
Data centres are electrically dense, with electrical work comprising the largest component of construction costs. SCEE Group has a strong presence in the data centre market, having announced thirteen data centre awards totalling over $120 million in the last four years. The company is currently working on data centres for major cloud providers in Sydney and supplying switchboards to data centres in Auckland and Victoria.
Looking ahead, SCEE Group is tendering or positioning for over $500 million worth of work to be awarded in the next two years for extensions at existing or new data centre builds across twelve separate projects.
Following the acquisition of MDE Group, SCEE Group has upgraded its FY25 EBITDA guidance to at least $53 million, up from the previous guidance of at least $48 million. The company expects this growth to be sustainable, with further earnings growth anticipated in FY26 and beyond.
IPD Group & Its Data Centre Potential
IPD Group Limited (ASX: IPG) is a leading provider of electrical solutions focused on energy management and automation.
The company enhances electrical infrastructure through advanced energy efficiency and secure connectivity solutions, ensuring safety and wellbeing. With a commitment to innovation, IPD is pivotal in the electrification and decarbonisation of the economy.
IPD operates two core divisions:
Products Division:
Distributes electrical infrastructure products from global brands like ABB and Emerson. The division’s offerings include power distribution, industrial control, automation, power monitoring, and hazardous area equipment. It also provides custom assembly, engineering design, technical support, and regulatory management.
Services Division:
Offers installation, commissioning, calibration, testing, maintenance, EV solutions, and refurbishment services.
While data centres currently make up a small portion of IPD Group’s end customer markets, the company recognises the potential for growth in this sector. The data centre market is experiencing strong momentum, driven by the increasing demand for cloud computing, digital transformation, and the need for secure and reliable data storage and processing.
IPD Group has demonstrated its capabilities in the data centre space by successfully completing projects such as supplying low-voltage switchgear for the Stack data centre and designing and constructing the high-voltage infrastructure for the Cloud Carrier data centre.
The global data centre market is expanding rapidly, driven by increasing demand for cloud computing, AI, and digital services. Investment in new facilities and the adoption of advanced technologies are key trends. Sustainability is also a critical focus, with data centres prioritising energy-efficient practices.
For the financial year ending June 30, 2024, IPD Group has provided the following earnings guidance range, excluding merger and acquisition costs:
Operating Earnings: $39.0 million – $39.5 million
Earnings Before Interest & Tax: $33.5 million – $34.0 million
This guidance reflects the company’s strong performance and the positive impact of its recent acquisitions, including EX Engineering and CMI Operations, which have strengthened its electric vehicle infrastructure team and expanded its customer reach.
The TAMIM Takeaway
While the AI revolution promises transformative breakthroughs across industries, identifying which specific AI applications and companies will emerge as winners remains challenging.
The “picks and shovels” investment strategy offers a compelling way to capitalise on the broader AI boom by investing in the companies providing critical infrastructure, tools, and services enabling AI development and deployment. From semiconductor manufacturers and cloud providers to data labelling firms and electrical services and maintenance companies, these enablers are well-positioned to benefit from AI’s proliferation regardless of which AI innovators ultimately lead the charge.
For investors seeking exposure to AI’s vast potential while mitigating stock-specific risks, a basket of carefully selected “picks and shovels” plays could prove a prudent approach to navigating this rapidly evolving technological frontier.
Disclaimer: IPD Group Limited (ASX: IPG), AMD (NASDAQ: AMD) and SCEE Group (ASX: SXE) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
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One of the most highly anticipated initial public offerings (IPOs) is set to hit the ASX with fast-growing Mexican quick service restaurant (QSR) chain Guzman Y Gomez set to list on the 20th of June.
IPOs on the ASX have had a mixed track record, with some companies experiencing meteoric success while others have struggled to live up to expectations. Notable IPO successes in years gone by include Domino’s Pizza Enterprises Ltd (ASX: DMP), which has delivered exceptional returns (despite recent troubles) since listing in 2005, and Afterpay Ltd (now Block, NYSE:SQ), whose disruptive buy-now-pay-later model propelled its share price to dizzying heights before being acquired.
However, for every success story, there are cautionary tales of companies that failed to capitalise on their public debut, such as Dick Smith Holdings, which collapsed into administration just two years after its IPO.
Companies often pursue an IPO to raise capital for expansion, acquisitions, or debt reduction, while also providing an exit opportunity for founders and early-stage investors to cash in on their investments. The decision to go public is a significant milestone, as it subjects the company to increased scrutiny, regulatory requirements, and the demands of public shareholders. When evaluating an IPO, investors must carefully analyse the company’s financials, growth prospects, competitive landscape, and management team, as well as the valuation and pricing of the offering.
The hype surrounding high-profile IPOs can sometimes lead to inflated valuations, making it crucial for investors to maintain a disciplined approach and avoid getting caught up in the frenzy.
So, should you think about GYG?
The Company
A Mexican-inspired QSR with a current network of 210 restaurants across Australia, Singapore, Japan and the US, GYG prides itself on the use of fresh, high-quality ingredients and offers a “100% Clean” menu with no added preservatives, colours, artificial flavours, or unacceptable additives.
The company operates a diverse range of restaurant formats including drive-thrus, strips, food courts, and university campuses. While taking its lead from other popular Mexican QSRs like Chipotle (NYSE: CMG) in the US, GYG attempts to differentiate itself with a stronger emphasis on using fresh ingredients and its diverse range of restaurant formats and ordering channels catering to different consumer preferences.
GYG looks to recreate a vibrant, fun restaurant design inspired by Mexican and urban street culture.
Details of the Deal
GYG’s offer price is $22.00 per share, valuing the company at an eye-watering $2.2 billion.
The proceeds will primarily fund the expansion of GYG’s Australian restaurant network from the current 185 stores to a targeted 1,000 stores over the next two decades. As a comparison, McDonalds (NYSE: MCD) had 1,043 stores in Australia as of April 2024.
The company had announced it was floating 10.9% of the business raising proceeds of $242.5 million. It has since increased that to $335.1 million with TDM Growth Partners reducing its stake from 29.7% to 26.2% following an additional sell-down of $92.6 million. The supplementary sale by TDM Growth Partners brought on by interest from Capital Research Global Investors, a major global investor in QSR chains committing to subscribing for shares at the offer price.
As part of the float, key backers TDM Growth Partners and Barrenjoey Capital will partially cash out, with co-founder Steven Marks retaining a 9.9% stake valued at $192 million.
Financial Performance & Valuation
GYG is projecting some impressive revenue growth, bringing with it a lofty valuation.
The company’s Pro Forma revenue forecast is $339.7 million for FY2024, with it estimated to grow to $428.2 million in FY2025. Operating earnings are projected to increase from $29.3 million in FY2023 to $59.9 million in FY2025. The IPO values GYG at an enterprise value to operating earnings multiple of 32.5 times, significantly higher than Domino’s Pizza at around 18 times and Collins Foods Limited (ASX: CFK) at just over 14 times.
This rich valuation has raised concerns, especially when compared to the global fast-casual Mexican chain Chipotle, which trades at a multiple of 45 times despite its stronger growth and brand recognition.
However, a controversy has emerged around GYG’s treatment of lease liabilities in its valuation. Critics argue that by excluding $210 million in lease costs from its operating earnings calculation, GYG can present a much higher estimate of 2025 operating earnings in an attempt to justify a richer valuation multiple. Properly accounting for leases could result in GYG being valued significantly higher on an earnings before interest and tax (EBIT) or a price to earnings ratio.
This has raised questions about the accuracy of GYG’s valuation in the IPO prospectus, which many be considered misleading.
The TAMIM Takeaway
While GYG’s growth ambitions are impressive, investors would be wise to approach this IPO with caution.
The rich valuation in comparison to other QSR players raises questions about whether the hype surrounding the offering is justified. The controversy around GYG’s treatment of lease liabilities, which could significantly understate its true leverage if properly accounted for, adds further uncertainty. History has shown that many high-profile IPOs struggle to live up to their lofty expectations once the initial excitement fades. Rather than getting caught up in the frenzy, prudent investors may be better served by waiting on the sidelines to see how GYG’s growth story unfolds as a public company. Only then can the true merits of the business be evaluated without the distortions of IPO pricing and promotions.
A cautious “wait-and-see” approach could pay dividends for those seeking to invest in GYG for the long haul.
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Turnaround stories on the ASX are a rare breed, and within the technology sector, they are among the rarest of all. Investors often shy away from tech companies burdened with high cash burn, lack of profits, frequent capital raises, product deviations, and management changes—typically a recipe for disaster. However, every so often, an unlikely contender begins to defy the odds, emerging from the depths with renewed promise and potential.
Such is the case with Catapult Group International Limited (ASX:CAT). This small-cap technology company, originally founded to enhance athlete performance through innovative wearable technology, has faced its share of challenges. Yet, in 2024, Catapult is proving to be a shining light, ticking all the right boxes and quickly climbing out of its previous struggles.
Catapult’s journey from an Australian startup to a global leader in sports technology is a testament to resilience and strategic pivoting. Now, with a focus on profitability and sustained growth, Catapult is capturing the attention of savvy investors looking for a hidden gem in the tech sector.
From Local Startup to Global Leader
Catapult creates technology to help athletes and teams perform to their true potential. Founded in Melbourne in 2006, Catapult emerged from a partnership between the Australian Institute of Sport (AIS) and the Cooperative Research Centres (CRC) to enhance the performance of Australian athletes ahead of the Sydney Olympics. Initially focusing on wearable technologies to address fundamental questions in sports performance, Catapult has grown from a little local startup to a global leader in sports technology, offering solutions across the entire performance ecosystem, from wearable tracking to athlete management and video analysis.
Catapult operates primarily in the sports analytics industry, focusing on collecting and analysing athlete performance data. The company’s foundational technology, developed through a five-year collaboration between the Commonwealth Cooperative Research Centre for Microtechnology and the AIS, integrates inertial sensors with GPS to track athletes. This innovative platform has paved the way for sophisticated tools that measure and enhance athlete performance. Today, Catapult’s operations are divided into three main segments:
Performance & Health: A SaaS platform that tracks athlete data using wearable devices.
Tactics & Coaching: Video analysis software that enhances coaching strategies and player performance.
Media & Other: This includes the Athlete Management System (AMS) and strategies to monetise video content to increase fan engagement.
The company’s commitment to making performance technology accessible to athletes at all levels is evident in products like PLAYR, an athlete tracking device designed for the consumer market. This device allows amateur soccer players to monitor their performance like professional athletes. Catapult’s client base includes some of the world’s largest teams and organisations, reflecting its influence and reach in the sports technology market.
Tailwinds and Leadership with Skin in the Game
The global sports technology market is a rapidly growing sector, valued at US$21.9 billion in 2022 and projected to reach US$41.8 billion by 2027, with an impressive compounded annual growth rate (CAGR) of 13.8%. This expansive market provides a substantial playing field for companies like Catapult to thrive and expand.
Catapult’s extensive global footprint is a testament to its influence in sports performance technology. With over 500 staff across 28 locations worldwide, Catapult works with more than 3,650 elite teams in over 100 countries. This broad network underscores the company’s capability to drive significant advancements in sports performance on a global scale.
A notable aspect of Catapult’s strength lies in its leadership and insider commitment. Key insiders hold approximately 18% of the company’s 261 million ordinary shares, demonstrating substantial ownership and confidence in the company’s future prospects. Additionally, nearly 26 million unquoted securities, including long-term and short-term incentives and various options, reflect the leadership’s vested interest in the company’s success.
Recent Results: A Promising Financial Turnaround
It hasn’t been a smooth ride for long-term shareholders of Catapult. The company initially rode the wave of post-COVID investment in promising growth stocks in 2020, only to see its share price decline sharply over 2022-233 due to disappointing results, capital raises for acquisitions, and a management change to steer the company in a new direction. Additionally during this period, Catapult shifted its focus towards the consumer/prosumer market, resulting in significant cash burn.
However, recent financial results indicate a promising turnaround. The market reaction has been optimistic about Catapult’s outlook following the company’s latest annual results. Some of the key highlights include:
Annualised Contract Value (ACV): A key indicator of future revenue, ACV grew by 20% in constant currency year-over-year, reflecting strong customer demand and successful cross-selling strategies.
Revenue Milestone: The company’s revenue hit a significant milestone of US$100 million, underscoring the strength of its software as a service (SaaS) strategy.
EBITDA Improvement: Operating earnings (EBITDA) reached US$9.3 million, a substantial improvement from a loss of US$11 million the previous year.
Net Loss Reduction: The net loss after tax improved to US$16.7 million, down from US$31.6 million in the prior corresponding period.
Revenue growth was driven by new customers and increased ACV per team, boosted by the company’s new video solutions. Catapult’s core SaaS metrics showed ACV retention improving to 96.5%, up 30 basis points year-on-year. Customer lifetime duration increased by 15.9% to seven years, and the number of pro team customers rose by 9.4% to 3,317 teams.
CEO Will Lopes highlighted this as a historic year for Catapult, with solid growth in free cash flow and profit margins. The company’s SaaS strategy has been pivotal, delivering substantial ACV growth driven by new customer signings and increased cross-selling with new video solutions.
The company achieved its free cash flow targets, generating US$4.6 million, a US$26 million improvement year-over-year, after paying down US$4.7 million of debt during the latest quarter.
Catapult’s FY24 financial results reveal a company that has not only stabilised but is also well-positioned for future growth. The achievement of positive free cash flow is a significant milestone, demonstrating the effectiveness of the strategies implemented by the new management team. The market responded positively, with Catapult’s share price rising about 10% upon receipt of these results, capping off a twelve-month period in which the share price has increased by more than 80%.
Looking Ahead
For FY25, Catapult’s management aims to sustain strong ACV growth and high retention rates while balancing growth and profitability. Management has emphasised the importance of adhering to the Rule of 40 to ensure cost margins align with long-term targets.
The Rule of 40, a key valuation metric for SaaS companies, suggests that the combined revenue growth rate and profit margin should exceed 40%. With a 43% rate, Catapult is performing well and shows strong potential for continued success.
“Our objective for FY25 is to deliver on our strategic priorities with a focus on profitable growth,” said Lopes. “We anticipate that this focus on profitable growth will also lead to higher free cash flow as our business scales.”
These metrics will serve as important indicators of Catapult’s progress towards sustained profitability and the development of a world-class SaaS business.
The TAMIM takeaway
Catapult is a rare turnaround story on the ASX, particularly within the technology sector. Despite past challenges, the company has shown remarkable resilience and strategic agility, transforming itself into a promising player in the global sports technology market. With improved financial results, effective leadership, and a robust growth strategy, Catapult is well-positioned for continued success. As the sports technology market expands, Catapult’s innovative solutions and strategic focus make it a compelling investment opportunity for those looking to capitalise on the growing demand for performance-enhancing technology in sports.
