Turnaround in demand provides tech company a long runway for growth

When Avid Technology (NASDAQ: AVID) released its Q3 financial results in late October, analysts following the company scrambled to upgrade their forecast for the share price.

The bullish results reflected what the Avid chief executive described as the turnaround in demand from the lows seen during the COVID-19 downturn in early 2020.

In his statement during the release of the financial results, Avid Technology chief executive Jeff Rosica said: "We are pleased with the beginning of the demand turnaround during the third quarter. Though COVID-19 continued to have some temporary impact on customer demand for parts of our non-recurring product business, we expect demand to continue the gradual recovery that started in Q3."

At the same time, he said Avid Technology has made adjustments to their business strategy and investment to quickly respond to market changes.

He added: "We're focusing even more sharply on the parts of the business that we believe will drive more profitable growth. We're also ensuring that we have the right cost structure so that Avid enters 2021 as a stronger and more profitable company."

Avid's Q3 results showed the following highlights:

• 14.1% revenue growth from the previous quarter as markets begin to recover from COVID-19 downturn.
• 73.9% year-on-year subscription revenue growth.
• 56.1% increase in operating income due to improved gross margin and significantly reduced operating expenses.
• 73.9% year-on-year increase in subscription.
• 58.1% year-on-year increase in paid cloud-enabled software services.
• Annual contract value was $271.9 million as of September 30, 2020, up 6.5% from $255.3 million as of September 30, 2019.

Who is Avid and what does it do?

Avid Technology is a specialist company that develops and sells software and hardware for digital media production and management.

You may not know it, but Avid's technology is behind some of the award-winning and popular movies, documentaries and video productions you may have seen recently. The company's video editing and audio editing technology are used by artists, film studios, cable television stations, recording and production studios.

It may not be as well-known or as popular as the big tech companies like Apple, Amazon or Facebook, which saw their share prices rocketing despite the COVID-19 virus, but given its place in the growing digital video and audio market, Avid has significant growth potential.

Based in Massachusetts, in the US, the company has operations in North America, the Middle East, Africa and the Asia Pacific. According to a company statement, most of Avid's revenue is split between the US and the EMEA region.

A technical analysis view of Avid share price

Increased focus on Avid Technology since late October has seen a substantial increase in daily trading volumes and gains that have pushed the stock price to 15-month highs. Although the climb away from the lows of May 2020 has been somewhat choppy, recent momentum favours further tests to the topside.

A clear break above the US$10.38-10.80 region would support the view that the market is breaking upward from a multi-year base pattern. Such a move would see the stock at fresh five-year highs opening the door to longer term gains.

Analysts' view of Avid share price

Following Avid's strong Q3 numbers, some industry analysts covering the company shared their consensus forecast.

The most optimistic analyst has a price target of US$17.00 per share, while the most pessimistic valued it at US$9.50 - a level which the stock has already surpassed.

The analysts also forecast revenue of US$398.5 million in 2021, which if met would be a satisfactory 7.0% increase from this year's numbers.

Based on the analysts' revised forecast there is a definite increase in optimism towards Avid Technology. As the company reconfirmed its revenue estimates, analysts are confident that Avid will track the growth of the wider industry.

Video/digital media industry outlook

Given the massive demand for video and video-related services including Netflix and Zoom during the pandemic lockdowns, industry research companies foresee continuing growth in this sector.

It's not hard to see why, when streaming video and on-demand services provide more convenience and flexibility to consumers.

While Avid Technology is not directly competing with the likes of Netflix and other video-services providers, the company does benefit from the growing demand for video and film products. With Avid's technology behind those films and video titles, it can only grow as the demand for more audio and video productions rise.

Conclusion

Given the strong quarterly rebound in Avid Technology's earnings and signs of recovery in the industry, we consider it a buy.

Though there may be some tentative and lingering patches of weakness in the company's business, we believe the demand for video and digital media technology is here to stay and will grow as more people demand convenience and flexibility.

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