Why this leading audio company sounds like a winner


The market share of the top 1% has continued to steadily climb over the past two decades, as I mentioned in my previous column, with around 40%-45% of today's EBITDA (earnings before interest, taxes, depreciation and amortisation) delivered by the top 1% of profit generators.

In essence, an increasing proportion of the "winnings" is going to a decreasing proportion of companies within industries.

One business that we believe is demonstrating these exact qualities is Audinate (ASX: AD8).

audinate hot stock share price AD8

Global leader

Audinate is a leading global provider of professional digital audio networking technologies. Its Dante platform distributes digital audio signals over computer networks, effectively turning analogue audio networks with many cables and cords into digital audio networks that connect through a computer network, making it easier for audio professionals to expand and contract these networks effortlessly.

Audinate's management had indicated to the market that setbacks emerged in live sound equipment revenue as festivals were cancelled around the world. This decrease was partially offset by increased demand in higher education and conferencing applications.

In recent weeks, however, the business updated the market and reported that first-quarter sales had beaten many analyst estimates. It is also now clear that it has experienced a steady improvement in trading conditions since May, leading us to believe the worst has passed when it comes to the COVID-induced slumber.

What it does

Through the Dante product, Audinate sells a protocol, which is essentially a microchip and piece of software that work together so any pieces of audio and visual equipment can interact with one and another. These software and hardware pieces are then included within the products manufactured by Audinate's customers, which include Yamaha, Sony and Bose.

The Dante product can in many ways be conceptualised in similar terms to Bluetooth. However, imagine if Bluetooth was a company rather than something that was owned by a not-for-profit cooperative.

As it stands, Dante is a clear global leader and boasts more than eight times the product adoption of its nearest competitor, with Dante's share of products in the market now increasing to more than 70%. At this stage, the business is still building scale, but at this rate of progression it is conceivable in our view that the Dante product will emerge as an unregulated monopoly.

Opportunities ahead

In simple terms, the company's hardware and software allow professional audio equipment (speakers, mixers and mics) to carry audio signals over a computer network, rather than using analogy cables. In future Audinate is looking to replicate this success in the digital video space.

In January 2019, Audinate released its digital video offering on the Dante network, which opens up an opportunity to double the addressable market. To date, progress with Dante video licensees has been encouraging, suggesting that the first Dante video products will be available during the 2021 financial year.

There is often a sizeable lag between when work with the manufacturer starts and when the new products makes it to market and starts generating sales and profits.

With the business developing the next-generation Dante audio and video software implementations to address a large and growing market, we think investors can benefit from watching this space.

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Michael Wayne is the managing director of Medallion Financial Group. With considerable experience in financial markets, Michael provides advice to a range of clients in both domestic and international equities, exchange trade funds (ETFs), managed funds and corporate deal flow.