How Atmos has placed itself in the middle of the COVID Zoom boom

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Production of video content, from Zoom calls, to semi-professional YouTube videos, to streaming services like Netflix and Disney+ is booming.

Atomos (ASX:AMS) has positioned itself right in the middle of this phenomenon and is growing rapidly. Revenue has increased by 29%p.a. over the last three years.

Atomos makes devices to monitor and record video production. But it is not simply a hardware company.

atmos share price

The company makes its own chips and operating system, and it has also developed or acquired standards.

One of the standards it developed in partnership with Apple, is the Apple ProRes RAW global standard for RAW video recording. This codec got off to a slow start, not being widely used, but that is now rapidly changing.

The ecosystem is expanding as Apple opened it up to work on Windows computers with non-Apple video editing software, and as camera manufacturers add it to their latest cameras. The codec is now enabled on 40 different cameras and currently the footage can only be captured by Atomos devices.

Atomos is a founder-driven business with a heavy focus on research and development. The company releases new or upgraded products on a regular basis. Jeromy Young founded the business in 2009. It was listed at the end of 2018.

Young held the role of CEO until recently when he decided to focus all his energy on product research and development. He also sold 10 million shares in February but retains a 4% stake in the business.

In addition to product led growth, Atomos have also made some strategic acquisitions. In October 2019 it acquired Timecode Systems. Timecode is a UK company that have developed a standard for synchronising the timestamps of multiple video and audio devices over a wireless protocol. It is used by film crews on productions such as The Avengers and The Grand Tour.

Building this ecosystem of products has put Atomos in a good position to start leveraging its exposure to video content production.

It traditionally supplied the pro video market such as people filming weddings, but is also experiencing strong growth from the social segment, as well as the entertainment segment. Their revenue is well diversified across the globe with the US accounting for 44% of sales.

Atomos took a hard hit from COVID initially. Revenue in January to June 2020, fell by 60% compared with the previous corresponding period. During this time management stripped a lot of costs out of the business.

Consequently, as things started to rebound in financial year 2021, it was able to leverage the top-line growth with an improving bottom line. Revenue quadrupled in the most recent half-year and for the first time, Atomos has made a bottom-line profit for financial year 2021.

Atomos have a strong balance sheet with $26 million in cash and no debt as at June 30. It also moved into a strong cash flow position generating about $7 million in free cash flow. This is aided by a large balance of accumulated tax losses and credits of $35 million which can be offset against future tax payable.

At this point in time, Atomos is yet to pay dividends. The share price has provided for a wild ride over the last few years, but since 30 June it has risen over 50%.

Consequently, based on valuation metrics like PE ratios, it is looking quite expensive, but determining the value of this business really comes down to an assessment of whether the strong historical revenue growth of the past can continue or even accelerate. There is no shortage of potential headwinds, but on balance it would appear that Atomos is well-positioned to start to gain significant scale from the bank of products and ecosystems that it has built.

The author's related parties have holdings in AMS

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Chris is a senior investment analyst with Spotee Consulting. He is an experienced leader and investment expert having worked in financial markets for over 25 years. This includes co-founding a stock market research business and running it for seven years until it was sold. He is qualified as a Chartered Financial Analyst and holds a Graduate Diploma of Applied Finance and Investment and Bachelor of Commerce Degree. He has been a regular contributor to Money since 2012.