Sangoma Technologies (TSE: STC) (NASDAQ: SANG), a “provider of hardware and software components that enable Internet protocol communications systems for both telecom and datacom applications,” is an intriguing stock to consider. This communications-as-a-service (CaaS) provider can be considered a deep-value stock by a few metrics. It also has a Strong Buy rating from analysts who think the stock can more than triple from current levels. Looking into its low valuation, that’s a possibility.
Sangoma’s Recent Results Showed Strength
Last week, Sangoma announced its Fiscal Q1-2023 results. The company grew its revenue by 24% to $64.05 million (all figures are in U.S. dollars unless otherwise stated), while its gross profits grew by 18% to $43.34 million, and its adjusted EBITDA grew by 6% to hit $10.74 million. Despite its earnings being negative, the company has positive free cash flow, which is arguably more important. Free cash flow came in at $1.17 million in the quarter, and this figure comes in at $13.65 million for the trailing 12 months.
Sangoma even maintained its outlook for Fiscal 2023, anticipating revenue between $275 million and $285 million with adjusted EBITDA between $48 million and $52 million. All of this sounds solid, but it’s important to know the company’s valuation before deciding whether it’s worth buying.
Can Sangoma Stock Really Triple in Value?
Depending on which metric you use, Sangoma stock may be very undervalued. Most notably, its price/book ratio is about 0.3x. This means that the stock is technically trading at 30% of its net worth. In other words, the stock can more than triple (just as analysts are anticipating) before reaching its book value. So, it’s definitely possible.
However, it’s hard to tell what Sangoma’s net worth truly is. That’s because most of its book value comes from intangible assets, the biggest intangible being goodwill. The value of these intangible assets is harder to realize than something basic like cash & cash equivalents. Therefore, take Sangoma’s book value with a grain of salt.
Still, Sangoma has never traded at a price/book ratio this low in at least the past 10 years. The lowest it got to was around 0.4x in September 2015, when the share price was under C$2.00. The stock soon soared, reaching a pre-pandemic high of C$19.25 and a post-pandemic high of C$38.50. If history repeats itself, it’s possible that the stock could be much higher in a few years.
Looking past its book value, the stock is trading at a price/FCF (free cash flow) ratio of about 6.7x. The company’s free cash flow per share has been pretty flat for the past five years, averaging $0.90, with its trailing-12-months FCF/share at $0.82. Its free cash flow is expected to grow in the coming years, but if history is a reliable indicator, its share count will grow quickly too. Therefore, it’d be safer to assume roughly flat FCF/share in the near term. Still, with a low multiple of 6.7x, there’s plenty of room for upside potential.
What is the Price Target for Sangoma Stock?
Analysts are incredibly bullish on Sangoma Technologies stock. It has a Strong Buy consensus rating based on five unanimous Buys assigned in the past three months. The average Sangoma stock price target of C$16.46 implies 204.8% upside potential.
Conclusion: Consider Sangoma as a Deep-Value Play
Based on its low valuation multiples, Sangoma may be a solid deep-value play. Analysts seem to think so as well. Down over 75% year-to-date, Sangoma stock is worth considering.
