Catapult (ASX: CAT) is a global leader in the athlete monitoring and analytics industry. The Australian-based company has come to dominate the global industry with representation in over 35 countries and in 35 different sports, including the US NBA and NFL, the English Premier league (EPL) and Australian AFL, NRL and Rugby.
Catapult is growing rapidly with sales growth of over 70% per year. We believe the company will continue to outperform based on its idiosyncratic growth drivers, market share growth and favorable stock specific developments. However, given Catapult is still in its early stages and has not reached the point of self-sustaining cash flows, it is considered a higher risk investment and is not suited to investors with a low risk tolerance.
In this economic environment of low growth, low interest rates and low inflation, it is difficult for investors to generate a satisfactory rate of return. With increased political uncertainty from Brexit and the subsequent downgrade of growth in Europe, investors can’t rely on the traditional cyclical sectors for superior returns. Therefore, stocks that can deliver growth independent to the underlying economy are likely to outperform. These include stocks, like Catapult, that have discovered a new technology, are forging a new industry or are growing market share.
Catapult sells its products into a very large and well-funded global sports industry. There are 62 major professional sporting associations around the world, which between them account for US$60 billion in revenues. These sporting leagues control more than 1100 teams with more than 25,000 paid professional players. In addition to the professional leagues, there are several times more amateur and semi-professional sporting codes. This is a significant opportunity for Catapult and is the main source of the company’s upside growth potential.
In addition to growth in the industry, Catapult has three key bottom-up drivers that should ensure its continued outperformance.
Firstly, the company is moving towards a subscription-based business model that will smooth revenue growth and partially lower the company’s risk profile. Secondly, Catapult currently earns most of its revenue from supplying the sporting clubs directly. However, the data captured by its systems has incremental value and can be used in ancillary services including the media, second screen applications, fantasy football games and gaming services. Although this may take time to develop, it is an exciting future opportunity for the company. Thirdly, Catapult spends a significant amount on R&D, which will help cement its place in the industry and make it hard for new entrants to compete.
Despite this upside, the company is not without its risks. These include new technology competition, irrational competitor behavior, poorly managed acquisitions and delays in signing new clients. In our view, the risks faced by Catapult are similar to other high-tech companies at this stage of their business lifecycle.
Although Catapult is not cheap, the stock offers an exciting growth opportunity and we believe the stock is still in an EPS upgrade cycle. Business momentum remains positive with higher than expected third quarter sales and improving operating cash flows. We now expect the company to comfortably exceed its FY16 sales target and we are excited about its future growth prospects.
[1]Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.