Initiation Research for Huddly IPO should put it on the strong rerating trajectory

Two weeks ago I suggested to look at buying IPOs in NOrway that sold off after its lunch. It was a good ideas and the share prices are up 10-30%. One of the was Huddly. Very solid company. Today, Pareto published the initiation research – see below. I am long and I am very bullish in the share price recovery of Huddly. Research is below:

High growth, unmatched partners & mispriced equity

Huddly is a Norwegian provider of video conference cameras, founded in 2013. Unlike other camera providers, Huddly’s products are software defined – atechnology endorsed by Tier 1 partners such as Google and Crestron, who continuously include Huddly’s cameras in their video collaboration bundles. A setup that has proved to be highly successful with triple-digit sales growth (118% revenue CAGR ’18-20) and world-class margins (29% EBIT margin ‘20). Despite this, the current valuation (~14x ’22e EBIT) implies a ~35-70% discount to peers currently growing at a slower pace, and seemingly doesn’t take into account our thesis of increased enterprise spending on video conference rooms in a post-Covid world. We initiate coverage with a BUY/TP of NOK 28, equalling pricing in-linewith peers and an upside of >80% to the current share price.Value proposition endorsed by Tier 1 partners

Unlike most camera providers, which offer standardized and non-dynamic solutions, Huddly’s products are all based on a common software platform. This enablesHuddly to do software upgrades, exploit data to enhance future products and maximize the current user experiences. Combined with an AI supported engine, it also offers features such as smart zooming, which frames the people in the room, and the ability to identify, extract and process content in the video stream, and much more. We like to think of Huddly’s products as software sold through hardware, and similarly the business model as a hybrid between the two. This new approach to video collaboration hardware has not gone unnoticed, with nine strategic partnerships now in place. As a testimony of its quality, eight out of 13 video collaboration bundles Google offers include Huddly cameras, thus being the preferred partner ahead of Logitech. With its core market estimated to grow by ~30% p.a. by 2023e and the return-to-the-office situation likely to alter the demand in favor of high-quality providers, we believe Huddly is positioned to continue its rise to video stardom.Triple digit sales growth & software like marginsSince the first commercial shipment of cameras in 2017, Huddly has grown revenues from close to nothing to NOK 366m in 2020 (118% CAGR ’18-20). While growth has been highly impressive on its own, a lean, R&D-centric organization combined with a fab-less setup and a strategic/channel partner sales strategy has not left profitability demised, as the EBIT margin reached 29% in 2020, above the median competitor at ~18%. With an ever-increasing product portfolio and partnerships with Tier 1 names (Google, Crestron and more) that continuously include Huddly’s cameras in their video collaboration bundles, Huddly has rapidly become a serious contender for the potential USD 90bn video conferencing market. Reflecting this, we estimate the company to grow revenues to NOK ~970m by 2023e, equalling a 2020-23e CAGR of 39% and achieve an avg. EBIT margin of 26% over the same years. While profitability will take a small hit in 2021e due to up-scaling, new product launches and unfavourable FX-movements, the outsourcing of both sales and production leaves little room for increased costs besides R&D over the next years. We therefore estimate margins to improve in 2022e and return to current levels in 2023e (EBIT margin of 28-29%).  Valuation – BUY/TP NOK 28Reflecting multiples in line with peers (22x ‘22e EBITDA & 29x ‘22e EBIT) and a DCF approach (8% WACC & 3% growth) we initiate coverage of Huddly with a Buy recommendation and a TP of NOK 28, equalling an upside of >80% to the current share price. Despite positive outlooks, the stock currently trades at 14x ‘22eEBIT, a ~35% and ~70% discount to hardware collaboration and Nordic software peers, respectively. We believe the latest drawbacks reflect a softer pre-announced Q1 and a misconception that Huddly was a Covid-19 trade. Contrary, we believe demand for Huddly’s products will accelerate post-pandemic and see upside to our estimates. With the stock already trading at a discount to slower growing, less profitable peers, we believe the current valuation offers a risk/reward that will not go unnoticed for too long. Key risks include loss of key partnerships and the associated revenue and increased competition.

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