Pareteum (TEUM) is an early stage growth stock that could be of interest to small cap investors given the viability of its MVNO (mobile virtual network operator) business model, which centers around platform enablement for migrating third-party telecom resources into an aggregated pool where MVNOs can access mobile bandwidth at wholesale rates, and also have operating and billing processes embedded into the back-end software.
What makes TEUM stock interesting is the growth narrative tied solely to MVNOs, which have grown in the past several years due to more favorable regulations that give companies who don’t hold their own network infrastructure the ability to participate in the market via wholesale rates. This is why the company is somewhat speculative in that it’s banking on more MVNOs adopting its platform, which they’ve shown steady progress in a number of regions outside the United States.
Oppenheimer analyst Timothy Horan defined the market opportunity as being significant:
Pareteum targets three markets: phones, IoT devices, and applications. It provisions services over the cloud in a virtualized way. There are currently five billion mobile phones globally and the same number of paying IoT devices. In five years, there will probably be six billion mobile phones and we estimate at least five times this amount of paying IoT devices.” Horan then discusses the unit opportunity which could be $0.10 to $10/month in terms of platform fees per phone services. When referencing those types of per unit margins and the given size of the market, Horan goes onto mention that, “the CPaaS (Communications platform as a service) market size is in the $2B range currently, but is growing an estimated 60% per year, and in the next five years should reach ~$10B.
Assuming there’s significant billings and account growth tied to MVNOs, and more jump onboard the platform, revenue will likely ramp at a quick pace. Recent news would suggest that momentum will continue given the streamlined process they have developed with 62 agreements giving them the needed scale and partnerships to onboard more MVNOs onto its platform. Recently, Executive Chairman and Principal Executive Officer of Pareteum, Hal Turner, commented, “We have developed, built, and delivered software services for a wide range of customers and we are rapidly moving into new markets and territories with ‘communications reimagined’ services. This record performance, our very first $100 million new 36MCRB (36-Month Contractual Revenue Backlog) sales month, reflects the strong value customers derive as they continue to buy our services.”
Keep in mind, the company is anticipated to grow by 242% y/y in FY’19 from $32 million to $111.23 million. Though, it’s unlikely to become profitable within 24-months, the revenue ramp-up is mostly contingent on their ability to gain traction with more MVNOs, so some of what’s embedded is the anticipated backlog from pre-existing agreements, but any additional business agreements with additional partners could drive the growth rate ahead of expectations in FY’20 or FY’21.
Maxim analyst, Allen Klee mentioned in a report:
TEUM currently trades at 4.4x our 2019 revenue estimate. Our $9 price target is based on 5x our 2020E revenue estimate. A peer group of SaaS and communication service providers trade at 8x 2020E revenue.
The company does seem undervalued given the embedded growth assumptions tied to their pre-existing contracts, which Klee defines, “There is upside to our estimates if the company is able to continue to convert its three-year, $938M+ contracted revenue backlog at recent rates and win new business.” Horan from Oppenheimer also value the company in a similar range:
The company’s ambitious goal is to connect any device to any network globally. This neutral connectivity platform, if successful, can be extremely valuable. The stock is trading at 4x revenue versus similar SaaS companies in the 8x plus range. We value the stock at $7, or 7x revenue, but note it is a venture capital-type investment with high corresponding risk.
When making a comparison to other software platform type plays, and anticipated growth from pre-existing contracts, the business growth narrative is at least definitive over the next couple-years with some upside that might not yet be priced-in. The business is at least hinged to a definitive mobile broadband market that gives it somewhat of an edge due to its end-to-end platform that makes managing and launching a mobile virtual network more viable, which they’ve earned demonstrable recurring revenue and continue to win contracts via their pricing model for their platform. The stock currently trades at $4.45, and with reasonable upside scenarios implying a range of $7 to $9 on revenue targets that seem reasonable given their revenue backlog. (See TEUM’s price targets and analyst ratings on TipRanks)
Disclosure: The author has no position in Pareteum stock.