Archived article
Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
magazineTune into Focusrite for big growth potential
Focusrite (TUNE:AIM) is a world leader in audio technology with investment in its software offering set to boost returns.
The shares have performed well as the company has been among the beneficiaries of the enforced stay at home trend created by Covid-19. As a result, they are not cheap on 26 times consensus forecast earnings, but we think the long-term opportunity more than justifies the price.
On 10 July the company said it would beat expectations for the year to 31 August 2020 with demand for Focusrite Audio Engineering and ADAM Audio products strong through lockdown, with sales coming through e-commerce platforms rather than physical stores.
Part of this sales success has been driven by a home recording boom during lockdown which we don’t see as being a one-off boost. The company signalled confidence in the outlook by restarting its dividend.
Historically the company’s products, which enable the recording of audio as well as mixing, editing and distribution, have been concentrated in the music industry. There is now scope to step out into areas like podcasting, computer game streaming and online learning as well as social media channels.
With a range of products at different price points the company can capture everyone from the amateur to the professional. Its high-specification hardware is highly rated by critics and users.
Focusrite does nearly all its business through distributors and third-party retailers and according to Peel Hunt achieves a gross margin of 40%, the assembly of the hardware itself being the main cost of operating.
Expansion on the software side could increase exposure to an activity which the broker believes should generate gross margins of 90% or more.
The company’s main platform in this area, Ampify, provides software and content for the creation of audio. The company has just launched its first product for Mac and Windows – Ampify Studio – and as a subscription-based service it should allow the company to enjoy recurring revenue, improving the quality and predictability of its earnings.
Focusrite has an opportunity to expand its presence in new markets, with Latin America a potential avenue for growth as it is one of the fastest growing parts of the world for purchase of music content.
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
