- Large industrial companies like GE and Dell are increasing investments in the Industrial Internet of Things and software infrastructure, recognizing that this is the next major business revolution.
- One of the few small/mid-caps executing well in this space, AKDS has an IIoT business growing rapidly, and the company just acquired a "moat" to protect and enhance the top and bottom lines. Inflection points could catalyze multi-bagger upside for AKDS quickly.
- AKDS just announced $5.3 million in revenue for quarter ending 8/31/17, an increase of over 1100% compared to revenue of $424,487 in the first quarter of fiscal year 2017!
- If AKDS were to trade at only a 4x multiple of their estimated $20 million in fiscal 2018 revenue, the Company's stock would be priced closer to $3.70, or approximately 460% upside from today's share price.
Dell Technologies Inc (DVMT) is the most recent large company signalling one of the biggest market opportunities - and investing opportunities - in decades. But it's small companies executing well, like Arkados Group Inc. (AKDS), that investors should be watching. The company just announced revenue growth in the last quarter of 1100% following a small, overlooked solar acquisition in the summer, and the stock could quickly move higher as investors understand the implications of that new deal.
Dell announced this month that it will commit $1 billion in research and development over three years to creating hardware and software that help manage the now-billions of devices connected to the web, or the so-called "Internet of Things." Everything from engines to thermostats use a network connection to share data in some way these days, and that's opened a tremendous market opportunity for the companies that can harness the data from these devices to improve efficiency and save businesses money.
The Multibillion-Dollar Market That Public Investors Have Barely Noticed
"We think edge computing could be 100 times bigger than the internet as we know it today," said Dell Chief Executive Michael Dell in an interview with the Wall Street Journal recently. "That may sound crazy right now but give it a few years and I think that will be more understood." Dell Technologies Capital, the company's venture investing arm, has stepped up investments over the past six months in related technology, like Zingbox, which makes Internet of Things device security.
The cost of connectivity hardware and data sensors is small, but Dell is betting there will be an associated boom in both computer hardware and software that acts closely with and in tandem to internet-connected devices.
This is called "edge computing" and it's where Dell expects to make a splash. But even with this large cash infusion, Dell is arguably late to the game.
General Electric Company (GE) has over the last five years been preparing for the emerging "Industrial Internet of Things," which will create the next big wave of productivity after cloud computing. (GE even claims to have coined the term "Industrial Internet" in 2012.) GE has been plowing money into this space, much like Dell, positioning for long-running and continuous residual income.
When GE sells a physical product, such as an industrial engine, it adds sensors to the product which transmit data to the cloud. The company's in-house cloud software, Predix, then analyzes the data and allows customers to optimize machinery, efficiency, logistics, or any one of many applications. The company not only charges for the equipment, but makes long-lasting and high-margin residual income on the cloud software component. With the potential savings from these optimized machines, business and municipalities find the recurring SaaS component inconsequential.
Browsing GE's GE.com/Digital offers insight into just how much time, money, and effort GE is putting into the future of IIoT. Research firm Gartner expects companies to double their spending on cloud infrastructure services by 2020, by about $70 billion, and GE pegs the full market size at $225 BILLION within three years!
How Investors Can Find Companies Prepared For This Explosive Upside
GE is one of just a few ways to participate in this emerging business vertical, and there are very few small companies prepared. With its size and might in the industrial business, GE is wise to be positioning for the future of IIoT.
What should investors be looking for?
Growth and a Moat. We've identified a small-cap company with huge potential in the IIoT space growing revenue at a rapid clip as they build a moat around the business: Arkados Group Inc. (AKDS). For the last few years, Arkados has performed hardware and software installation for companies, assisting them in making their machines and infrastructure more efficient. By using full-featured, industrial-grade sensors and other peripherals the company assists businesses in implementing various types of smart solutions for machines, buildings, lighting and power, and even full cities. Their goal is to implement the most energy- and cost-efficient solutions for lighting, power systems, heat, and industrial machinery.
With the installation complete, Arkados collects recurring payments for the use of their proprietary cloud-based and high margin software. They're capitalizing on the same tremendous market for which GE is positioning.
The future of IIOT is much like pharmaceutical companies a few years ago, with a gang of new players and approaches emerging to IPO in the last three years, some of which have gained in value tremendously as investors realized the opportunity in this high margin sector. The neurology focused Adamas Pharmaceuticals (NASDAQ:ADMS) exploded higher by nearly 70% from $14 to $23 a month ago and has continued a strong trend, gaining 25% this week with fresh investor interest. Investors are looking for the next big segment, and unlike drug stocks, IIoT has the fundamentals to deliver.
Helios and Matheson Analytics Inc (NASDAQ: HMNY), for instance, demonstrate just how fast small-cap stocks can rally from pennies to dollars when good news strikes. This analytics company rallied 1050% from September into October as investors recognized the big-data and revenue potential of their latest venture with Moviepass. It's the potential for this similar kind of data analysis that has smart traders eyeing AKDS in the same way.
Revenue Up 1100% Last Quarter; Could Justify Multiples of Current Stock Price for AKDS
Arkados is ahead of the curve in recognizing the pivot to the IIoT that companies like Dell and GE are making, and this business has been a successful one for Arkados already with total revenue for their fiscal year ended May 31 increasing 25% year-over-year to $2.346 mln.
AKDS has a history of Growth. And they just acquired an incredible Moat, which sets the company up for explosive growth under the right execution.
This summer. Arkados announced they have acquired a mid-Atlantic solar energy installation business called SolBright Renewable Energy, which did roughly $12 mln in revenue in AKDS' fiscal 2016.
Already the company has announced revenue for the first few months after the acquisition, or the company's first quarter of fiscal 2018, was a massive $5.3 mln, an increase of over 1100% compared to revenue of $424,487 in the first quarter of fiscal year 2017! Meanwhile, gross profit increased to $782K from $44K year over year, an increase of over 1600%.
With the tuck-in, AKDS could more than quadruple their annual revenue, but more importantly the deal brings in a huge potential source of business that the markets have yet to understand.
With solar installations, AKDS will be able to pitch and include their sensor/software integration for these clients, setting up the possibility of a tremendous recurring, high-margin source of revenue and locking in a long-time customer. This source of revenue growth - and the realization of a new Moat to lock out competition - has been overlooked by the public markets so far. But not for long.
With this new revenue, AKDS trades at just over 1x implied sales when including the SolBright business. That kind of multiple may not last long as investors realize the potential for high-margin revenue within AKDS' IIoT business and software services, and trading to a multiple of even just 4 times their estimated $20 million, or $80 mln in market capitalization in fiscal 2018 revenue, would imply a stock price closer to $3.70, or 460% of upside!
What could set off this move? Arkados' just-released earnings reports included SolBright's revenues, and their next quarter's results should put new eyes on this underappreciated, quietly executing company.
Looking for these "Inflection Events" is key to small-cap investing, and AKDS may be set up for HMNY-like attention in the near-term as investors notice the value-add solar business for what it is.
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