Well well well….
I am doing my best to prioritize writing in schedule. I can’t say that I’m getting better, but the inertia of starting and working through a post has reduced.
I’ve owned Sangoma for years (since 2013) and have averaged up a few times. I have a running word doc that I use to keep track of news that is well over 100 pages long now.
This post is meant to illustrate the path of one of my more successful investments. I will be a tour guide through the last 7 years of history of this business and the share price. I’ll share my thoughts and some insights that you can only gain by experiencing the ride. It demonstrates some of my evolution as an investor. I believe that investments like Sangoma represent what an average investor can obtain with the right mix of research, luck and (most importantly) patience. It should be noted that this investment did not rely on a drill bit, a phase 3 trial, some new technology adoption or a sky high valuation to be successful. Not to say that you can’t make money following any of those strategies, I’m just going to focus on what works for me.
Start with low expectations
When I first wrote up Sangoma in 2013 it was trading less than liquidation value, it was actually trading at less than net cash. It was a lumpy product business that was on the (slow) decline. They managed to grow top line a few million by launching new products that eclipsed the slow decline of legacy products (PSTN analog phone cards), while running a small profit. At the end of 2013, new products had grown from 0 to 5mil in a little over 2 years. The CEO (who is still on board today) was focused on growing top line without needing to continuously raise money to support a business that doesn’t generate cash. At this point the risk was dead money.
Continue with business improvement without the market caring
For 3 years the business continued to improve and the stock went down or sideways at best. 3 years. And it actually started in 2011. So really 5 years of slow business transformation without share price moving. I wrote about in an update here.
During these 3 years, the business was restructured and 3 acquisitions were made. There was always something to muddy each quarter’s results. Inventory levels, age of receivables, margins, acquisition integration, not spending the cash quick enough, etc. In the meantime, they continued to build the business strategically and gain more share of wallet from about 10-20% to 50% of a business’s connectivity purchases. Recurring revenue continued to climb higher each quarter as they focuses on cloud based and services. I was starting to see the long term potential of the business and was happy with management’s ability to grow the business without diluting shareholders.
Success after years
The work started to bear fruit. The share price responded (finally) at the end of 2016. I ended up adding a little in early 2017.
I think it’s important to note that as an investor I could have sold out a reasonable gain. It’s tempting to take the money made and distribute it into other opportunities.
The business had successfully shifted and expectations have changed. This was not the net-net from 2013. This was a larger, more complex organization and your measure of success needs to change. Quarterly lumpiness was really reduced and visibility increased to the point where they could issue guidance in fiscal 2017.
Their biggest and most complex acquisition to date was executed (VoIP Supply). This was the 5th acquisition they made since I had followed the business (MicroAdvantage, Schmooze, RochBox, VegsStream). I will admit I was usually skeptical of the acquisitions on the surface, but I had seen enough examples of well executed acquisitions and integration to continue to hold the majority of my position.
Continued execution and share price appreciation
Sourcing and executing deals continued with CCD, Digium, VoIP Innovations. The share price has responded, although it still trades at a discount to peers.
Operations were humming along nicely. Continued share price appreciation was driven by the ability to source and execute acquisitions with minimal dilution. The scale and complexity of each acquisition grew bigger incrementally. It was reassuring to see that the CEO was able to keep the pipeline as robust as he did.
Performing continued due diligence is a must. Once you realize that you have a multibagger potential in your portfolio, the last thing you want to do is sell after a rough quarter when it won’t matter several years down the road. As the price grew, the company took up a larger and larger percentage of my portfolio. Things like culture, ego, foresight, customer focus are now the most important things.
Obviously I don’t think Sangoma will be a 10 bagger from here, but there are still many things to like about the business. They have been quite insulated from covid, their shares trade at a discount to peers, the are a well run organization, over half of their revenue is recurring, and they still have the ability to up-list on the the TSX from the Venture. I will continue to hold.
The journey to multibagger is colorful. I have about 30 different data points on their financial results over the years. 7 quarters have been softer than anticipated, 15 have been stronger than anticipated and 8 have been kind of meh. I think each multibagger comes with it’s own merit badges or battle scars that you have to earn and endure.
- stock price drops of 15-20% after a “bad” quarter
- 1-3 years of no price appreciation
- naysayers telling you that it won’t work out
- market prognosticators predicting another recession worst than all the other ones put together
- everyone else getting hilariously rich off bitcoin
Anyone care to share a multibagger story?
*the author is long shares of Sangoma Technologies ($STC.v) at time of writing