Avigilon CEO: Spending Surge Resulting in ‘Short-Term Pain for Long-Term Gain’
Analysts caution the company is jeopardizing profits, but Alexander Fernandes says the company’s recent spending is necessary.
Avigilon Corp. is one of Canada's worst-performing stocks after outpacing the market last year.
The concern is about the pace of growth, Pardeep Sangha, a Vancouver-based analyst with PI Financial Corp., told Bloomberg.
“They want to have a $500 million run rate by 2016,” he said. “Can you get there by just spending a lot of money and getting a lot of customers in a land-grab opportunity or do you do it profitably?”
Sangha maintained his buy rating on the company while dropping his target price on the stock to C$33 from C$38. The average twelve-month target price of nine analysts stands at C$33.06, according to data compiled by Bloomberg. Eight analysts say buy the stock, one says hold and one says sell, according to the data.
The reason for caution is that earnings are not a primary goal of Avigilon even by 2016, Robin Manson-Hing, a Toronto-based analyst with CIBC World Markets, said in an Aug. 8 note to clients.
“Despite a number of levers to easily reach this target along with $500 million run-rate sales, they may choose to continue and accelerate the build-out of their workforce,” Manson-Hing said in the note.
Fernandes said he can boost profit while still reaching his revenue target. The $15 billion market for surveillance-camera systems is growing 15 to 20% a year, he said.
“By 2016, the market should be approaching $20 billion dollars,” Fernandes, a founder of the company, told Bloomberg.
Avigilon plans to hire more salespeople and eventually build manufacturing plants to make the cameras in Brazil and China to avoid import tariffs, he said.
Investments in regions outside the company’s core will pay in the long term, said Raymond James analyst Steven Li. Finishing the integration of acquisitions, VideoIQ, will make products even more attractive in the coming quarters, he said in an Aug. 8 note to clients.
So far, Avigilon has managed to offer its blend of hardware, software and service without a direct competitor. If that changes, it could make Fernandes’s goal harder to achieve, Manson-Hing said.
“We’re not waiting around for competitors to copy our stuff, and they will,” said Fernandes, who owns about 3.2% of the company, according to data compiled by Bloomberg. Focusing on innovation and being the first to market will keep Avigilon ahead of the game when that day comes, he said.
For now, investors are waiting to see if the company can execute on its revenue goal without damaging its potential to make profit, said Sangha.
Avigilon finished the quarter with C$156.7 million in cash, earning C$5.7 million from operating activities during the quarter, according to the second-quarter report.
“At the end of the day how much cash are they going to generate on a quarterly basis?” Sangha said. “How profitable will it be as they get to that C$500 million goal?”
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