Description

Sonim Technologies is a microcap stock trading at an extremely low valuation with lots of upside potential.  The company sells rugged phones for first responders, firemen, police, utility workers, etc.  The company primarily sells through service providers such as AT&T, Verizon, and Sprint.  These providers then sell the phones to end users which can be both public and private entities.  Sonim’s phones are currently sold primarily in the U.S. but are beginning a global rollout as well.  These modern phones are meant to replace old Motorola push-to-talk phones which have very limited functionality.  Management seems to be straight shooters and have been very transparent with the transient (we think) issues that the business has faced recently.

After first responders had communications issues during 9/11 causing many needless fatalities, the government decided to set aside a specific wavelength for emergency use which could not be accessed by the public.  This wavelength was auctioned off to the service providers and AT&T won the auction.  The condition of the auction was that AT&T now had to build a nationwide network for the use of first responders and other emergency groups.  AT&T dubbed this network FirstNet and began its buildout.  So far AT&T has built out approximately 55% of this network and its is live in many cities currently.  Verizon is competing in this first responder arena as well by saying that in emergency situations first responders would get priority on its network so a 9/11-type situation would not recur.  A number of other countries are also working on FirstNet types of networks and will be targets for Sonim once they are operational.

Sonim offers a range of products for its target market.  Its XP3 is a flip-phone targeting the low end of the market.  Its XP5 is a feature phone targeted at the mid-range of the market while its XP8 is a high-end touchscreen phone.  All of its phones are subsidized by the service providers to make them attractive to their public sector and enterprise customers.  Generally the phones are subsidized to a $0.99 price point as are competing phones so then the brands compete on functionality.  The players in the market are Sonim, Kyocera, and Motorola.  Sonim phones are generally thought to be best in class and also offer 3 year warranties which their competition does not match. 

Sonim recently issued a press release dramatically guiding down its revenue forecast for 2019.  Revenues are now supposed to be flat for the year versus 30% growth previously.  This lowered guidance stems from three issues.  First, Verizon only subsidized Sonim’s XP8 to $249 over the past few months versus the $0.99 price point that its customers are used to paying.  This basically shut off the spigot at Verizon until it increased its subsidy to price the phones at $0.99 which it did two weeks ago.  Rumor has it that Verizon was angry that Sonim signed an exclusive deal with AT&T last year so it punished the company with these lower subsidies.  As Sonim’s stock price took a 45% hit on this news I think that Verizon got its wish.  The next issue was what the company called a software issue with its XP8.  Upon discussion with management, I would call it a Qualcomm issue rather than a Sonim issue.  The XP8 came out with the latest issue of Qualcomm’s processor and it had some early bugs that Sonim had to work through which caused some issues and delayed some sales.  Finally, because Sonim was dealing with these other two issues, it did not get some of its Tier 2 carriers the phones they ordered causing further revenue issues.  It seems as if all of these issues are currently behind the company and 2020 is looking like a good year for the business.

Is Sonim a good business?  It has 35% gross margins and is selling into a lightly penetrated market in the U.S., and brand new markets that are opening up internationally.  There is not much competition and there is a high barrier to entry in the certifications that each manufacturer needs to get from each carrier for each new phone.  Management has been transparent about its recent issues and seems poised to execute from discussions with them. 

On the surface, Sonim does not appear to be a cheap stock and does not show up on any low price / earnings screens as it is currently losing money.  It does show up prominently on enterprise value / revenue screens, however, with an EV / Revenue ratio of 0.4x.  What this means is that if the company were able to attain a 10% operating margin, then it would trading at an EV / EBIT ratio of 4x and would probably have a P/E ratio near 6x, which is extremely cheap, especially for a growing business.  A 10% operating margin seems attainable for Sonim as it has quite a leveragable business model.  As its main customers are a handful of service providers, it will not need to ramp up sales costs as it grows revenue.  It has already absorbed its public company costs so its G&A should not grow much.  Its research and development costs should also not increase that much as it already has a full line of handsets and it will probably just need to keep refreshing those on a 3 year cycle.  The key comes down to top line growth which we feel is attainable given the needs of its U.S. customers, international expansion, and the Sonim’s strong competitive position in the industry.  Given this, what is a fair target price for the stock?  Outlandish as it seems at the current stock price, I think an EV/Revenue multiple of 2x is fair for a business with this growth potential.  That would lead us to a $15 price target (near where the stock was trading post-IPO).

What could go wrong for the company?  As seen from this last guide-down, Sonim is at the mercy of its service provider customers and the subsidies that they provide on its phones.  In the long run they want to work with Sonim as Sonim has the best products in the industry but there may be short term factors that may occasionally get in the way.  The other potential issue, also seen from this guide down, are software bugs that may delay launches of new phones.  I think that Sonim has learned from this experience not to be the test dummy for Qualcomm’s latest chipsets and such issues can be minimized in the future.                   

Catalyst

If sales bounce back with Verzion, I think the stock will pop and keep moving in the right direction.