A Hidden Gem to Bank on the Transformation to 5G

Baylin Technologies Inc. (TSX:BYL) has tremendous growth potential, but is it your kind of investment?

| More on:

Bargains can more often be found in the small-cap than in the big-cap space because there’s much less analyst coverage on small caps. Baylin Technologies (TSX:BYL) may be a hidden gem with a market cap of about $150 million.

Baylin Technologies looks cheap on a forward basis

At $3.67 per share as of writing, Baylin’s estimated price-to-earnings multiple of above 50 seems ridiculously high. However, when you factor in the transformation from 4G to 5G and the hardware that’s needed, Baylin may actually be severely undervalued.

In fact, the analysts at Thomson Reuters have a 12-month mean target of $5.83 per share on the stock, representing 58% near-term upside potential. However, Baylin is not a short-term story. If the company executes well, it will have many years of growth ahead of it.

What does Baylin Technologies actually do?

Baylin is in the business of wireless communication. The company believes it will grow for a long time with the shift to 5G, which is where the company is focused on in North America.

Specifically, Baylin develops wireless antennas for cell phones, antennas for embedded systems (think the Internet of Things), and infrastructure antennas leading up to the 5G network. It’s also involved in satellite communication.

Baylin’s financial performance

From 2014 to 2017, Baylin’s revenue increased by a compound annual growth rate of about 26%, and its gross margins expanded by about 10% to roughly 30%, as the company reduced cost by outsourcing tasks that were non-critical to its core business.

Here are some key metrics compared to the same period in 2017. As you can see, the company has further expanded its gross margins recently, which is a positive.

Q1-Q3 2017 Q1-Q3 2018 Change
Revenue $67.3 million $100.2 million 49%
Gross profit margin 31.5% 39.7% 8%
Net loss -$4 million -$6.1 million -55%
Diluted loss per share -$0.18 -$0.16 11%
Adjusted EBITDA $3.6 million $11.4 million 215%

How’s Baylin’s balance sheet?

At the end of Q3, Baylin had current assets of $78.8 million and current liabilities of $33.3 million, which equated to a strong current ratio of 2.36. The company’s debt-to-asset ratio was 0.52. So, the company is not overleveraged.

Investor takeaway

Due to the small size of the company (a market cap of $146.6 million as of writing), Baylin has little analyst coverage. According to the few analysts who cover the stock, they’re all optimistic about Baylin’s growth potential.

In the past two years, Baylin spent about 12% of its revenue on research and development, while in 2015, it spent about 15%. So, the company is still investing meaningfully into the business, which we hope will lead to future growth.

As of now, the company still operates at a net loss. However, based on adjusted earnings, it could turn a profit as soon as this year.

Interested investors should do more research on Baylin, and if you still like the company, size your position accordingly. For example, one might allocate less than 1% to a small-cap name such as Baylin but be willing to allocate as much as 5% in a large-cap core holding.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Baylin Technologies Inc.

More on Tech Stocks

calculate and analyze stock
Tech Stocks

Growth Stocks: A Once-in-a-Decade Opportunity to Get Rich

Growth stocks are generally cheap now. So, this year is a good opportunity to shop for growth stocks, perhaps through…

Read more »

grow money, wealth build
Tech Stocks

$10,000 Invested in These Growth Stocks Could Make You a Fortune Over the Next 10 Years

Growth stocks such as Dollarama and Chewy are well poised to deliver outsized gains to long-term investors.

Read more »

online shopping
Tech Stocks

Is Shopify Stock a Buy in March?

Shopify stock has had a volatile run, but fundamentals are strong, and valuations are much lower after its 71% decline.

Read more »

data analyze research
Tech Stocks

2 Top Stocks to Buy in March 2023

Given their solid financials and high-growth prospects, these two stocks are excellent buys right now.

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Is Kinaxis Stock a Buy at 52-Week Highs?

Kinaxis stock is up 31% in the last six months, though 5% in the last year. So as the stock…

Read more »

healthcare pharma
Tech Stocks

Should You Buy WELL Health Stock After Q4 Earnings?

Given its solid financials, healthy growth prospects, and attractive valuation, I am bullish on WELL Health.

Read more »

A data center engineer works on a laptop at a server farm.
Tech Stocks

2 Tech Stocks That Could Set You Up for Life

Canadian investors can set themselves up for the future with top tech stocks like Descartes Systems Group Inc. (TSX:DSG).

Read more »

dividends grow over time
Tech Stocks

Got $1,000? Buy These Hot Growth Stocks Before They Take Off

Investors won’t want to miss these buying opportunities. Here are three discounted growth stocks to load up on today.

Read more »