MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Merewether Capital portfolio manager Luke Winchester.
What’s hot right now?
“I mean we have to talk about AI don’t we?”
Nvidia just overtook Apple to become the second largest business in the world and Luke says Microsoft is next with a big target on its back.
“Around the world it’s an arms race to build data centres and chip capacity, everyone wants a piece of the AI revolution and I, for one, welcome our new robot overlords, but until then how about a few microcaps that can benefit from applying AI to their business models?”
Luke’s top ASX picks
Aerometrex (ASX:AMX)
“Let’s start with Aerometrex.” Luke told Stockhead last week, “Full disclosure, own this one with Merewether.”
“They are an aerial imaging company, a mini Nearmap is the easiest way to describe them, but they have done a great job over the last few years of fighting their incumbent competitor and growing their ARR for their subscription product (MetroMap) from <$1m in 2019 to around $10m today.”
On top of MetroMap Luke says they also do some LIDAR and 3D capture for customers, meaning they provide the widest range of spatial data capture in the industry.
“What is exciting though is the size of the spatial data market itself is expected to grow very strongly in the coming years not only on the back of better image capture quality, but more importantly more use cases as machine learning and AI is applied to the image datasets.
“I think AMX are very well positioned to benefit from that trend, it is easy to dismiss them and say the 1000 pound gorilla Nearmap will dominate, but it overlooks the fact that Aerometrex was founded in 1980 and is very well regarded for their product quality in the industry.
“They were slow to adapt to the changing market that Nearmap pioneered by sticking with their project based capture for too long and not pushing the subscription product in earnest until a couple of years ago, but as I said before they have since grown it strongly and the launch of their AI-powered ‘Insights’ module last year should drive that further.
“As for the numbers, they are moving the right way and starting to deliver what investors want to see as the large investments in fixed assets (planes and cameras) and image capture are winding back so the EBITDA profitability they currently report is starting to fall better into cashflow and statutory profits will come in the near future.
“Ultimately I think they are the best example of how micro/small cap investors should think about investing into the AI trend. Find companies with proprietary data (like AMX’s image datasets) that they can apply AI to drive further value for customers.”
Ai-Media Technologies (ASX:AIM)
“I also like Ai-Media (AIM) and own it as well with Merewether. I mean they have AI in the name, what more do you want?!”
(Editor’s note: the AI actually stands for “Access Innovation” but never let the truth get in the way of a good story.)
“These guys provide captioning services, primarily targeting the live broadcast/enterprise market.”
Luke says, when it listed back in 2019 it was akin to an Appen (ASX:APX) style business (not the sort of peer you want to be lumped with…) where they engaged a large pool of trained stenographers to complete contract work for customers.
“Of course AI comes along and the rapid improvements in speech to text technology means human stenographers have now been taken over by the Skynet. This has meant a steady and likely terminal decline for Ai-Media’s human-based Services segment, BUT investors shouldn’t ignore the tailwinds for their Technology segment which will go close to doubling revenue from $18m in FY22 to over $33m in FY24.”
The Tech segment lumps in a few different products but the key is AIM’s industry dominant encoding technology, Luke says.
“Making captions appear on a screen isn’t quite as simple as pointing an AI algorithm at a video feed (especially for live broadcasts), with the feed needing to be split and the audio feed isolated, that audio feed encoded, encrypted and then put into an automated captioning program before being paired back up with the video feed and given back to the customer for broadcast.”
All within seconds when the broadcast is live.
“As I said, AIM has a dominant position in classic broadcast where captioning is required under legislation, but the cost of a human stenographer (~US$80-100 per hour) meant live captioning was rarely used outside of those regulated environments.
“But like AMX above, the exciting thing with the emergence of AI is it is expanding the use cases,” Luke says.
“With the cost of live captioning reduced to ~$8 per hour through automation, it is far more cost effective for many more customers such as universities, courts, conferences and churches. Ai-Media do have their own automated captioning product Lexi (built off the existing dominant speech to text engines) which they are growing strongly but importantly it is the dominant position of their encoding network that provides the strong platform to leverage the emergence of AI and provide a competitive advantage over much larger peers.
“Even better is the numbers are already stacking up for Ai-Media, they have a large amortisation bill from past investments/acquisitions but on a cashflow or normalised earnings basis they are generating $3-4m right now and growing strongly.
“Investors are not paying a high price at the current $65m market cap for the structural growth on offer.”
Mach7 Technologies (ASX:M7T)
“Finally what about Mach7 Technologies (M7T). I don’t own this one with Merewether – just on the valuation being a touch too high but like the long term story.
“These guys share a couple of characteristics with Aerometrex above, they compete against a much larger peer (Pro Medicus) with the ability to apply AI and machine learning to a deep dataset of images. Of course the key difference is M7T are in the medical imaging space with their key eUnity Diagnostic Viewer providing a platform for medical professionals to view a wide range of diagnostic images.
“There’s been a lot of debate about the emergence of AI in this space and whether it can replace radiologists, but whatever the view is there is no doubt AI tools are here to stay.
“I’m not sure the emergence of AI or machine learning tools expands M7T’s addressable market like the two examples above, but nonetheless I like the fact their viewing software is the platform that AI will be required to sit on top of, their core business won’t be replaced and can only be enhanced by the tools and programs coming in over the top.
“As I said before, investors should be trying to find these examples, not necessarily companies trying to program or use AI themselves, but rather a business with a core product or service required by their customers that can overlay AI over the top to add value.
“Numbers here are very muddy, they are currently transitioning from licence based revenue to recurring subscription so they will be disrupted for a couple of years if past indication of other companies making the transition holds up, but I encourage investors to focus on ARR. Right now that is a tick over $22m against the $150m market cap and ~7x is a bit too steep for me right now but I expect ARR to keep growing and if that multiple can fall to 4-5x it becomes very attractive in the med-tech space.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.
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