American Virtual Cloud Technologies: The Turnaround Looks Good, But I Want To See Revenue Growth Execution

American Virtual Cloud Technologies, It's among the top trending nano-cap stocks on Fintwit as of the time of writing. AVCT transitioned from a special purpose acquisition company (SPAC) to an operating business in April 2020 after buying IT services company Computex for $61.8 million in shares and debt. The latter was just recently sold to Calian Group (OTCPK:CLNFF) for $30 million and what's left is in its portfolio is cloud-based, real-time communications platform Kandy Communications.

Introduction

It's no secret that I like covering meme stocks as I think many of them provide compelling short-selling opportunities. However, today is different as I think I've found a small retail investor favorite with decent potential - American Virtual Cloud Technologies (NASDAQ: NASDAQ:AVCT). It's among the top trending nano-cap stocks on Fintwit as of the time of writing and think that there is an interesting turnaround story here.

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I'm not bullish yet as I think AVCT still has some work to do and that the share price could drop in the next month or two as retail investor interest fades. However, I think this company is worth putting into my shortlist. Let's review.

Overview of the business and operations

AVCT transitioned from a special purpose acquisition company (SPAC) to an operating business in April 2020 after buying IT services company Computex for $61.8 million in shares and debt. The latter was just recently sold to Calian Group (OTCPK:CLNFF) for $30 million and what's left is in its portfolio is cloud-based, real-time communications platform Kandy Communications.

Kandy was bought in December 2020 for $43.8 million in shares and debt and it specializes in Unified Communications as a Service (UCaaS), Contact Center as a Service (CCaaS), and Communications Platform as a Service (CPaaS) solutions through a white label platform. Basically, it provides a platform for companies to build voice, video, messaging, chat, and collaboration capabilities into their existing applications.

AVCT is operating in a crowded space and looking at its product offering, my view is that the company is something of a jack of all trades. Not being specialized in a single service isn't necessarily a bad thing as I think that the platform could be attractive for companies that are looking for several services. As long as Kandy can carve a niche for itself, it's all good in my book

AVCT

In my view, Kandy has been growing at an impressive pace over the past few years and you can see several recognizable names among its clients.

AVCT

AVCT

However, I think that AVCT made a strategic mistake by deciding not to sell its business at a good price when it had the opportunity. In April 2021, the company received an unsolicited offer to be acquired for about $9 per share. You see, the share price stands at $1.01 as of the time of writing and I think you can already guess why AVCT ran into trouble - the debt. In my opinion, financing a loss-making rapidly-growing business with debt instead of equity is a recipe for disaster that usually leads to stock dilution and this is exactly what happened with this company. Since both Computex and Kandy were acquired using convertible debentures, those had to be converted to reduce debt. On January 1, 2021, the number of shares outstanding was 19.8 million. Today, the company has over 89 million shares outstanding and this number is set to increase further in the future as AVCT announced at the end of February that it entered into a $15 million securities purchase agreement, which can be increased to $20 million.

Overall, I think that AVCT is making the right moves at the moment. The $45 million coming from the share issue and the sale of Computex will allow the company to pay off its debts, which stood at $17.5 million as of September 2021.

AVCT

Also, AVCT can now focus its resources on the development of Kandy. This business unit generated revenues of $12.6 million and a gross profit of $1.1 million for the first nine months of 2021. For 2022, AVCT expects its revenues to grow to over $37 million, which translates into an annual growth of around 100%.

AVCT

With growth rates like these, I wouldn't be surprised if AVCT becomes profitable in 2023. So, why am I saying this company is worth keeping on the shortlist and not investing in right now? Well, it's because of the large retail investor interest that has already pushed up the share price by over a third in the past week. In my view, this interest is likely to fade away in a month or two, just like it has happened with tens of similar situations I've covered on SA over the past few years.

There are currently a large number of posts about AVCT on websites like Twitter, and StockTwits. You can find links there to popular Discord servers for traders, including Eagle Investors and Xtrades which have over 253,000 and 148,000 members, respectively. Note that the company isn't doing the promotion of its business or shares itself, but this is being done by a substantial number of private investors and traders.

Another concern of mine is that revenue projections for Kandy could be missed, which means that there could be further stock dilution coming. Looking at the income statement, you can see that revenues of the platform came in at just $4.15 million in Q3 2021, which is less than a third of the total sum for the first nine months of the year.

Investor takeaway

I think that AVCT made a mistake by financing its acquisitions with debt and that it didn't accept an offer for its operations at $9 per share. There has been significant stock dilution over the past year, but the balance sheet looks strong now and Kandy is expected to double its revenues in 2022. Can these ambitious goals be achieved? Well, it seems too early to tell whether an optimistic outlook is justified. Also, I'm concerned about Kandy's poor gross margins, and I think ACVT's market valuation could drop over the month or two as retail investor interest declines, just like I've seen multiple times over the recent past.

Overall, I think that AVCT and Kandy could have good market potential and that this is evidenced by the $9 per share offer the company received. However, I want to see at least two quarters of execution on that projected 2022 revenue growth as well as gross margins improving before I consider investing in the AVCT. 

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading. 

Source: seekingalpha

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