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December 2013
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AmbiCom’s Growth Suggests That It Is Undervalued


By TDM Financial

The wireless medical device industry is expected to grow from $23.8 billion in 2012 to $59.7 billion by 2018, according to Research and Markets, due to increasing demand for remote patient monitoring and diagnostics, aging populations, and growing hospital deficits. Researchers added that wireless network technologies represent the largest market segment within this market and will continue to be the largest contributor over the coming years.

AmbiCom Holdings Inc. (OTCQB: ABHI) is well positioned to capitalize on this niche as a designer and developer of wireless products for the medical device industry. The company’s wireless modules add Wi-Fi or Bluetooth capabilities to third-party medical devices like infusion pumps, heart monitoring machines, and glucose meters. These agreements generate high-margin, recurring revenue over time for investors in its stock.

Profitable Triple-Digit Growth

AmbiCom Holdings reported revenues that increased 120% to $3,300,472 during FY 2013 due to increased demand for its wireless products from customers who expanded their business into the U.S. market. Management anticipates that demand will continue to rise with the introduction of new products like its SDIO card, as well as the introduction of wireless home medical devices for the retail market like its solar ionic toothbrush expected to hit shelves in 2014.

On the bottom line, operating expenses decreased by 16% due to lower research and development expenses, public relations and professional fees. The company’s 53.1% gross margins and lower operating expenses boosted net income from a loss of $595,700 last year to a positive $530,013 this year. Operating cash flow also increased 432% to $403,619, demonstrating just how robust these improvements really were throughout the year.

The company’s balance sheet showed cash and equivalents that increased 139% to $595,871, providing management with more flexibility moving into FY 2014. Current assets also increased 38% to $1,045,712, and total liabilities decreased 44% to $444,789, which yields a strong current ratio that puts the company on solid financial footing.

“Sales in the wireless medical device industry have grown at a rapid pace over the past few years as healthcare providers seek increased outpatient services and wireless technologies reduce service requirements and enhance patient quality of life,” said the company’s CEO. “We expect to see ongoing top- and bottom-line growth from this segment, driven by high-margin recurring income while simultaneously focusing on a number of other initiatives to drive value.”

Undervalued Given Growth Rate

The price-earnings-to-growth (“PEG”) ratio is commonly used to determine how undervalued or overvalued equity may be relative to its growth. PEG ratios are calculated by dividing the current price-earnings (“P/E”) ratio by the company’s projected growth rate over the next five years. As a general rule, companies with a PEG ratio of less than 1.0x are considered undervalued and desirable since investors may not be properly valuing their growth.

AmbiCom Holdings reported diluted earnings of approximately $0.029 per share with 18,118,995 diluted shares outstanding. With a stock price of $0.18 per share, as of November 25, 2013, the earnings per share figure yields a P/E ratio of approximately 6.2x. The market is assuming that the company will grow at a rate of just 6.2% over the next five years, assuming that a PEG ratio of 1.0x is considered to be a fair value.

Given its triple-digit growth in FY 2013 and the underlying market’s double-digit growth rate, the company is likely to see growth rates that exceed 6.2% over the next five years. A conservative estimated 5-year growth rate of 25% would equate to a share price of $0.725, assuming again that a 1.0x PEG ratio is a fair valuation. With a current share price of $0.18, this represents a significant 303% premium to the current value assigned to the company.

Trading at Discount to Peers

AmbiCom Holdings appears to be trading at a discount to its industry peers and the broader market. According to Morningstar data, its peers have an average P/E ratio of 20.8x and the S&P 500’s average stands at 17.1x. The company’s 6.2x P/E ratio appears undervalued by comparison. Assuming that it reached just a 15x P/E ratio, its stock could be trading at around $0.435 per share, or 142% higher than its current share price.

The company also trades at a discount to its peers when looking at price-to-sales (“P/S”) and price-to-cash (“P/CF”) ratios. Morningstar’s data shows that the industry and S&P 500 both have a P/S ratio of 1.6x that is 60% higher than AmbiCom’s 1.0x ratio. The company’s P/CF ratio of 8.1x is unusual for the wireless medical device industry which usually operates at a negative cash flow and is lower than the S&P 500’s P/CF ratio of 10.7x.

Potential Investment Opportunity 

AmbiCom Holdings represents an attractive investment opportunity. After reporting triple-digit growth in FY 2013, the market is assuming that it will grow at just 6.2% per year moving forward. Investors willing to bet that the stock will grow at a 25% rate over the next five years could see a share price of $0.725, but even just being valued equally alongside its peers could lead to a share price of $0.435, or a 142% premium to the current market price.

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