Among Canadian growth stocks, you generally hear the same names being mentioned regularly: the constituents of DOCKS (Descartes Systems Group, Open Text, Constellation Software, Kinaxis, and Shopify) or the up-and-coming companies like Lightspeed POS. In a previous article, I’d mentioned Tecsys, which is a lesser-known company that could see tremendous growth in the coming years. Today, I will identify another growth stock that could give you huge returns.
First, I will explain how I got to this company. I used a stock screener and searched for companies in Canada. I then looked for companies that have reported sales growth increases of at least 10% over the past five years, a trailing 12-month return on investment of 10% or higher, and positive gross and operating margins. This screener produced a single company listed on the TSX: Tucows (TSX: TC)(NASDAQ: TCX).
Why Tucows is an interesting investment option
Tucows initially made its name within the internet community as a domain name registrar. In fact, in 1999, the company was one of the original 34 registrars identified by the Internet Corporation for Assigned Names and Numbers. Because of its strong footing in the industry over the past 20 years, Tucows has become the largest publicly traded domain registrar in the world. This segment of its business provides excellent recurring revenue for the company.
Seeing as the domain registration business is quite mature, the company needed to find additional sources of revenue to ensure further growth by the company. In 2012, Tucows released Ting Mobile as a mobile virtual network operator (MVNO). An MVNO is the practice of providing mobile services by obtaining access to existing networks rather than implementing proprietary infrastructure. To do this, Tucows has established deals with Sprint and T-Mobile. In 2014, the company announced its purchase of ISP Blue Ridge, which later led to the release of Ting Internet.
Tucows is also lead by a solid management team. Generally, I look for companies that are founder-led, but Elliot Noss may be the next best thing. He has been with the company for over 21 years and is the largest individual shareholder in the company with a 6.82% ownership stake. The remaining company insiders account for 2.58% ownership, which brings the total insider ownership stake to just under 9.5%. This is an adequate amount of insider ownership, as it identifies a company that is willing to be rewarded according to the performance of the company.
Risks
Of course, investing in this company does not come without its risks. The biggest issue was mentioned previously. The domain registration business has not been a large driver of growth for the company, and it is currently still the largest source of revenue for the company. That means it is relying heavily on the growth in Ting Mobile and Ting Internet.
It is also a possibility that the company’s access to the Sprint and T-Mobile mobile networks could be revoked in the future, leaving them with an entire business segment without any functionality. However, this is a very unlikely scenario, as access by Tucows onto those networks provides those companies with revenue.
Foolish takeaway
Tucows is a small-cap stock with big potential. There are definitely risks to consider, but the company is being led by a very competent management group, and it has been constantly innovating, as the internet landscape has changed over the years. This could be a great stock to watch or perhaps even start a small position in. Tucows should be a big player in the internet industry for a while.
