Long-Side Trade Recommendation for an Under-the-Radar Tech Stock
We've found a near micro-cap tech name that offers an intriguing opportunity for investors.
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What stock was up 305% year to date and is set to report on Thursday afternoon?
I'll give you a hint: It's down 8% on Wednesday morning. The stock symbol is not AI, but close to it. I'm talking about AudioEye AEYE. Who the heck is AudioEye? Good question. The firm is a small-cap (just barely) digital accessibility platform company out of Tucson, Arizona. I say "just barely" because at a market cap of $262.4 million, so the firm is just $12 million to $13 million away from being and had been until this past spring, a micro-cap.
AudioEye provides internet content publication and distribution software as well as related services that enable the conversion of digital content into more accessible formats. The firm's solutions are backed by machine learning and AI-driven technology that locates and corrects common accessibility errors. This technology addresses the needs of those suffering from dyslexia, color blindness, epilepsy and more. The technology includes "always on" testing, remediation and monitoring services as well as periodic auditing, and human assisted technological remediations on top of legal support services.
Thursday Afternoon
Obviously, this is an under-the-radar tech company. That said, there are four sell-side analysts that do follow the name. Expectations are for a Q2 GAAP EPS of $-0.04, adjustable to $0.10 on revenue of $8.43 million. That would be an improvement over the same period one year ago when the firm reported an adjusted $-0.02 or GAAP EPS of $-0.17 on revenue of $7.84 billion. That would be good for year-over-year sales growth of 7.6%.
Expectations are currently for a full year of GAAP break even or better performance by 2025 on full-year sales growth for that year of 17% over full-year 2024 sales growth still expected to top 10%.
Coming In...
For the 12 months ending with the March (most recently reported) quarter, AudioEye had generated $200,000 in operating cash flow. Don't laugh. I expected this to be a negative number. Capex spending over the 12 months brought free cash flow down to zero. Still, not a negative number.
Looking at the balance sheet, this firm had, at that time, a cash position of $7 million and current assets of $13 million. That was versus current liabilities of $11.4 million that included no long-term debt, but $6.3 million in unearned revenue. As we know, unearned revenue is not a true financial obligation but an obligation of goods and/or services owed.
This had at that time put the firm's current ratio at a healthy enough 1.14, but if adjusted for unearned revenue, an overtly robust 2.55.
The Chart
I think I see a small cup with a handle pattern with a $26 pivot. That would provide a rough target price of $31. Others may think that they see a double top reversal pattern with a $17 pivot. That would be good for a downside target of $13 or $14. The stock will likely be volatile tomorrow.
Long-Side Trade Idea
- Purchase 100 shares of AEYE close to the last sale of $20.00
- Sell one $17.50 put expiring on Friday for about $1.40
- Purchase two $15 puts expiring tomorrow for roughly $0.70 a piece.
Note: The options trades provide for protection down to $15 through Friday without increasing net basis. The options trades could also trigger the purchase of a second lot of 100 shares at $17.50, leaving the trader with an average price of $18.75. Should the trader end up long 200 shares, September 20, 2024, $25 calls are currently trading for about $2.00. That would be a quick way to knock another $2 or so a share off of the trade's net basis.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
