Some of the world’s most prescient and powerful investment banks have been preaching the gospel of the “Internet of Things” for a few years now. We’re talking names like Goldman Sachs . . . and every day brings the disruptive vision of a world where everything is connected and talking to the network one day closer.
Goldman itself was so stunned with the economic weight of that vision that it made the rare decision to make the report public instead of keeping it behind the firewall where only elite clients can see. It’s worth at least skimming.
The number of networked devices is set to triple sometime shortly after 2030. There’s already 12 billion of them crowding for space on the network now. Phones were just the first stage. As every new appliance and vehicle, thermostat and light switch — and even buildings themselves — grows a screen and gets “smart,” they’re going to need a LOT of bandwidth.
Forward-looking companies like FTE Networks Inc. (FTNW) are working as hard as they can to make sure the world has the network capacity it’s going to need. Demand is already overwhelming.
FTNW alone has a $396 million backlog of projects it needs to finish before it can even start working on new business . . . and that backlog grew $74 million last month alone. That’s 23% month-over-month growth. As management says in that press release, “the company continues to add new contracts.” They evidently aren’t kidding around.
Demand is tracking so much faster than FTNW can actually build those networks for a simple reason. These aren’t the no-frills fiber connections that drove Internet 1.0 two decades ago. This is integrated right into the building, replacing on average eight legacy networks that can’t communicate with each other and chew up a lot of redundant bandwidth on the way back to the global network.
Needless to say, it’s ready for 4G wireless connectivity throughout the site. Everyone can run 360-degree video teleconferences and manipulate Big Data from every desk. There’s an onsite data center built into the design in the name of efficiency . . . everything is an order of magnitude bigger and faster than legacy commercial connectivity.
Twenty years ago, you could get away with running your office on a server and a router. Now, with the Internet of Things stepping up the amount of data flowing through the system at all times, you want an entire server farm, right there in the building where it’s close and transmission speeds are as fast as it gets.
That’s the FTNW network, what they call Edge Computing. As much computing as possible happens on the “edge” of the Internet, close to the smart devices and the people who need them to stay connected 24/7/365. Remember, phones plug into the Internet now . . . that’s the VOIP handset on a modern office desk . . . and the security system needs the ‘net too. The day is coming when the lights and heat will plug in. Send the door a text message to lock or unlock. No network, no door.
People say these “smart buildings” are going to be a $30 billion development market by 2022, barely three years over the horizon. There’s already $8 billion a year going into this type of integrated network.
Right now that global market is up for grabs as everyone does as much work as they can handle. But FTNW has a few strategic edges on the “me too” IT crowd. For one thing, they’ve already got scale on their side. They booked $86 million in revenue last quarter and $84 million in the quarter before that, so it’s not like they’re ramping up from zero.
I don’t know about you, but if I were building a luxury office building or condo complex, I wouldn’t waste time with the little guys. My project is too valuable for them to learn on the job. I’d go straight to the people who have the resources and the expertise to do great work all the time. That’s FTNW. They wired Bloomberg. Fox. The NYSE. A couple of months ago they scored $36 million to hook up “one of the oldest and largest financial institutions in the U.S.”
No names . . . JPMorgan? Goldman Sachs itself? We know Goldman loves a smart headquarters!
And realistically, I’d go where the consultants tell me to go. That’s CBRE, the sprawling $16 billion real estate behemoth, which has actually partnered with FTNW to “accelerate the adoption” of its next-generation network infrastructure. Here’s how cool this is: when CBRE merely mentioned the CrossLayer, FTNW stock jumped $4 in a matter of days.
And this is not some penny play, either. FTNW is on the New York Stock Exchange and frankly looks “oversold” here at $13. It takes force to move this chart that much, but that’s just how big the CBRE relationship is:
So with powerful friends, it’s only natural that FTNW has been booking more contracts from building operators desperate for better broadband than it can satisfy right away. I know that can be perplexing from an investment perspective . . . why not just staff up fast and keep the cash register ringing as fast as the deals are signed?
But here’s the deal. Networking is capital intensive. You need to buy a lot of expensive hardware and run a lot of the fastest cable around to hook up a building. Bigger buildings need more cable. Go too fast, you can end up underwater.
FTNW learned from previous generations of network build out. A lot of the principals have pedigrees going back to Level 3 Communications and the dawn of the modern Internet backbone. They don’t want to overcommit and wash out. They’re in it for that $30 billion opportunity materializing in the next few years.
That means letting each project fund the next one, a little slow but nice and steady. Sure, there’s some debt on the balance sheet, but $90 million in notes isn’t huge leverage when you’re bringing $86 million to the top line every three months . . . and that revenue run rate us up 72% from last year.
Besides, on an operating basis, FTNW breaks even on this scale. The profit isn’t huge, but it’s clear that once you add another quarter of growth the efficiencies really start adding up. Management anticipates a total of $350 million in revenue translating into $30 million EBITDA this year. That’s a sustainable enterprise. They can keep doing that a long time.
And compare those numbers to the other connectivity providers out there. FTNW carries an enterprise value of $207 million right now. That’s barely 0.6X annual sales if you don’t factor in any growth at all. It isn’t even 7X EBITDA. Peer group averages close to twice the price on a sales basis and 50% higher earnings multiples.
Factor growth back into the picture and compared to the market as a whole the numbers are striking. Wall Street is cheering stocks that are “only” growing sales 10% . . . the real question might be why FTNW trades down here below its peers.
Looking around, I wouldn’t be surprised if the answer is simple visibility. Investors are gaga for any pure play on the Internet of Things and it doesn’t get much purer than being the company that brings the bandwidth and makes the buildings smart.
(We’ve barely touched the high-tech vision FTNW has for these buildings once they’re online, by the way. Security. Surveillance. Eyes, ears and brain. Recurring revenue. Take that, Silicon Valley giants!)
But I looked around and FTNW has maybe ONE top-line analyst following its moves. It’s hard to bring a lot of buzz when you don’t really have “consensus” and “whisper numbers” and all that to drive eyeballs, even when you’re big enough to attract institutional investors.
That may change with a little more scale. After all, FTNW is breaking even now. The needle is moving . . . and street-level traders hungry for that Internet of Things have a rare chance to move ahead of it. Take that, Goldman Sachs!
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