Tucows Inc.

Tucows Inc. (TSX: TC) operates in technology market primarily in the United States and to a lesser extent in Canada and Germany. Its services touch upon two segments in the technology sector; Domain Services and Network Access Services. 

Key updates:

• Growth from the Domain Services: In H1FY21, the company reported a higher sale from its Total Domain Services at CAD 123.486 million, higher than CAD 119.670 million in pcp. The increase was primarily due to improved whole Domain Services and higher value-added services during the period. Moreover, the above segment contributed 84% of the total revenue as compared to 72% in pcp.

• Latest Acquisition news: Recently, the company reported acquisition of Simply Bits, which is a leading fixed wireless network service company located in Tucson, Arizona. The above acquisition would mark the company’s footprint across the Southern Arizona market, while it will be able to leverage Simply Bits' wireless expertise within the small fiber-to-the-home segment.

• Improved cash cycle days: In Q2FY21, the company posted an improved cash conversion day of 12 days, significantly lower than the industry median of 27.6 days. The above indicates that the group is efficient to convert its investments in inventory and other resources into cash flows.

Q3 FY21 Financial Highlights:

• TC announces its quarterly result, wherein the company posted its net revenue of CAD 75.893 million, as compared to CAD 74.311 million in the previous corresponding period (pcp).
• Gross profit stood at CAD 18.024 million, declined from CAD 19.941 million in pcp. The slide was primarily due to a lower income coupled with increase in Network expenses, and higher Depreciation of property and equipment cost.
• Total expenses stood lower at CAD 21.248 million, as compared to CAD 18.629 million in pcp, due to increase in general & administrative costs, higher Sales and marketing expense and technical operations and development cost.
• Net income for the period was recorded at CAD 1.375 million, as compared to CAD 0.716 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the increase in competition within the Internet services, the company might witness a loss of market share which might subsequently lead to price competition. 

Valuation Methodology: EV to Sales Based

Stock Recommendation:

The stock of TC has generated a decent return of ~8% on an YTD basis and is currently quoting at ~18% lower than the 52-weeks high of CAD 120.21. We expect a decent performance from the company supported by improved revenue from the Domain Services. Hence, considering the above facts, we give a “Buy” rating on the stock at the closing price of CAD 114.40 on November 05, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on November 05, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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