Why Tucows Inc. Is Plunging Today

Tucows Inc. (TSX:TC)(NASDAQ:TCX), the world’s second-largest domain name registrar and one of North America’s leading providers of mobile phone and internet services, released record fourth-quarter and full-year earnings results this morning, but its stock has responded by plunging over 8% to open the day’s trading session.

The stock now sits more than 25% below its 52-week high of US$71.75 reached back in December, so let’s break down the fourth-quarter results, full-year results, and the fundamentals of its stock to determine if we should use this weakness as a long-term buying opportunity.

The record financial performance

Here’s a quick breakdown of eight of the most notable financial statistics from Tucow’s three-month period ended December 31, 2017, compared with the same period in 2016:

Metric Q4 2017 Q4 2016 Change
Network Access Services revenues US$25.15 million $18.76 million 34.1%
Domain Services revenues US$65.47 million US$30.05 million 117.9%
Total revenue US$90.62 million US$48.81 million 85.7%
Gross margin US$25.74 million US$16.42 million 56.7%
Adjusted EBITDA US$15.28 million US$7.33 million 108.3%
Net income US$11.20 million US$2.82 million 297.6%
Basic net earnings per common share (EPS) US$1.06 US$0.27 292.6%
Net cash provided by operating activities US$14.08 million US$9.07 million 55.3%

And here’s a breakdown of six notable financial statistics from Tucow’s 12-month period ended December 31, 2017, compared with the same period in 2016:

Metric Fiscal 2017 Fiscal 2016 Change
Total revenue US$329.42 million US$189.82 million 73.5%
Gross margin US$84.52 million US$63.05 million 34.0%
Adjusted EBITDA US$41.36 million US$30.13 million 37.3%
Net income US$22.33 million US$16.07 million 39.0%
Basic net earnings per common share US$2.12 US$1.53 38.6%
Net cash provided by operating activities US$31.90 million US$22.51 million 41.7%

Stock-buyback program announced

In a separate press release, Tucows announced that its board of directors has approved a US$40 million stock-buyback program, and it will begin today and end on or before February 13, 2019.

Should you use the sell-off as a buying opportunity?

It was a phenomenal quarter overall for Tucows, highlighted by growth across all of its key financial metrics, and it capped off an incredibly strong year for the company, so I think the market should have responded by sending its stock significantly higher; that being said, I think the weakness represents a very attractive entry point for long-term investors, because the stock is now wildly undervalued based on its growth, as it trades at less than 25 times fiscal 2017’s EPS of US$2.12 and less than 17 times the consensus analyst estimate of US$3.19 for fiscal 2018.

Tucow’s stock has taken a beating since a short seller targeted it in January, but I simply cannot ignore the incredible growth the company is experiencing right now, so I would use the recent weakness as a long-term buying opportunity.

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Fool contributor Joseph Solitro has no position in any stocks mentioned. Tom Gardner owns shares of Tucows. The Motley Fool owns shares of Tucows. Tucows is a recommendation of Stock Advisor Canada.

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