March 15, 2022 -- InvestorsHub NewsWire --
via pennymillions --
iQSTEL Inc.
(IQST)
Summary
- iQSTEL is very close to achieving profitability.
- iQSTEL’s telecom revenue is growing rapidly and gross margins
are improving.
- iQSTEL’s higher margin technology products are nearing
fruition.
- I see the current fair market value at $1.07.
iQSTEL (OTCQX:OTCQB:IQST) is a microcap holding company that I have
covered here at Seeking Alpha. The company’s primary revenue stream
comes from its telecom operations. But iQSTEL also has, or is
working on, several innovative technology products such as
Blockchain, Electric Vehicle (EV), EV batteries, Fintech services,
and Internet of Things [IOT] smart devices.
In my last article I rated iQSTEL as a “Speculative Buy” and I
saw a fair market value of $.71 for the telecom business alone.
Since then, the stock has reached over $1.00, before drifting back
to prices near where they were before. No new financial results
have been filed yet since Q3 21 and those results are not expected
until the 10-K is released, presumably after March 31 of this year.
But the company has provided several updates, and I believe the
company is stronger since I wrote about it last. I see the dip in
price as only adding support to the speculative buy opinion. I see
a current fair market value of $1.07.
Financial Recap
I covered some key financial points in my previous article that
I will include here as a re-cap. To begin, iQSTEL’s net income
showed improvement with substantial gains three quarters in a row.
The loss in Q3 21 was negligible at just over $100,000, and the
trend clearly points to a reasonable path towards profitability.
See graph below.
Shareholder equity held well in that it dropped just a bit less
than the small amount of negative net income. The company
maintained a positive balance of total assets to total
liabilities.
Cash decreased by about 66% during the third quarter to
approximately $1.2 million, likely in part due to the small
negative net income. The current cash position appeared to provide
enough to finish out the year, even if the company’s net income did
not improve.
iQSTEL decreased its general and administration expenses
slightly year-over-year and continued to see the benefit of
becoming “debt-free” of toxic debts such as convertible notes and
warrants. Interest expenses were less than 1% of 2020’s Q3 at
$6,802 for Q3 21 vs $913,592 for Q3 20.
Telecom gross margins showed much needed improvement but needs
to show further improvement to really bring in profitability. This
is especially true for what I label “SMS Austin” when looking at
the breakdown. SMS Austin is the largest contributor to revenue but
has a low gross margin performance at just 3.06%. SMS Austin is the
newest of their telecom business, and company guidance in general
is that it takes some time for new telecom business to grow
margins. It will be interesting to see if margins improved in Q4,
and now even into Q1 of 2022 as small % gains in gross margins on
large blocks of revenue can make an enormous difference to net
income.
Improvements to financials were validated as iQSTEL moved up the
OTC ladder of tiers in 2021. iQSTEL advanced to the OTCQB level
earlier in the year, and quickly was upgraded again later to the
OTCQX level. OTCQX is the highest level available in the OTC, and
it is only available to companies that meet their financial
requirements.
Recent Developments
In my prior article I included a graph that showed iQSTEL’s
revenue gains since 2017. The graph included the company’s then FY
21 revenue forecast of $60.5 million. Since that time iQSTEL
informed that full year 2021 revenue will be reported at, or very
near, $64 million, or about a 6% upgrade in that short timeframe.
The company has also added that their revenue projection for FY 22
is $90 million. See graph below.
With 2021 completed iQSTEL has an impressive (projected) 70.86%
revenue CAGR since 2017. If you add forecasted data for 2022 the
CAGR is 64.33%. And it’s worth noting that iQSTEL has a history of
forecasting below actuals. A lot of revenue has been added since
2017, but even the expected growth rate from 2021 to 2022 is
projected at 40.63%.
M&A activity could increase the 2022 projected revenue
amount, and iQSTEL just recently advised that they are currently
drafting two separate acquisition agreements for which they expect
to close on soon. Clarification was included that each acquisition
is expected to augment the telecom projection of $80 million
revenue for 2022. Note that the other $10 million in the forecast
to make $90 million is what is projected, thus far, to non-telecom
business.
iQSTEL has indicated that it plans to fund M&A activity with
investment from a banking firm. No specific details on a name of a
firm, or definitive closure information has yet been provided. But
the company last reported work on a $60 million deal to fund growth
objectives over the next three years.
Information on iQSTEL’s non-telecom divisions has been provided,
but again not in a lot of detail yet. The company has shared photos
and other information regarding its EV motorcycle. It appears that
a small number, maybe over 10, motorcycles have been manufactured
to specifications. Shipments from that batch were sent to the U.S.,
Panama, Venezuela, and Spain. The unit sent to Miami, Florida is
being tested presumably as among the final steps prior to full
scale production and sales. iQSTEL plans to provide more details
soon, but they have disclosed that Panama was selected as a
regional distribution center for Latin America, as Panama is well
suited to serve in that purpose. Of course, Panama is a major
shipping center with the Panama Canal.
iQSTEL announced that they won the 2022 IoT
Breakthrough Award for the second year running for “Smart
Appliance Product of the Year”. This is a noteworthy award as other
category winners and participants include names of large or notable
companies such as Bosch, GE, Apple, Lenovo, Tile, Ring, Cisco, and
Nvidia. Last year iQSTEL won this award for their IoT Smart Tank
product. They were awarded this year for their IoT Smart Gas
product.
iQSTEL advised recently that their IoT Smart Tank product, that
was sold to an unnamed Fortune 500 Company, is deployed, and
operating with the planned 2,500 units. These units should be
providing monthly recurring revenue according to prior information
from the company. I assume that a big corporation like this would
have many, many more tanks available to furnish the product. There
is no word of expansion yet, but I believe that it seems reasonable
that the customer would want to use the product for several months
or so before deciding to do a full rollout. If for no other reason,
perhaps just to see if any changes or upgrades to the product are
needed before making the larger investment.
I’m not sure if or when they will name the Fortune 500 company,
but iQSTEL did advise that they see potential to sell the product
to 8 to 9 other big corporations. They further advised that they
see the same potential for 8 to 9 big corporations to target for
their IoT Smart Gas device. I assume there could be many other
small or regional companies to target as well.
It’s hard to say this early just how well these products may
perform for iQSTEL or how many companies may choose the products. I
would think that if the first big company likes it then that could
speak well for gaining other big customers. Sometimes a first
established leader in the product category looks like the one to go
with. Also, it may help to keep in mind that each of these iQSTEL
products are award winners from a major IoT competition. That alone
is selling point, implying a superior level of utility, and one
that may create a perception of the product being “the best”.
iQSTEL’s Blockchain offering “MNPA” has not been covered a lot
by the company in recent months. This product allows mobile phone
users to easily retain their existing phone number when switching
providers. I have not seen any data on sales, but it may be
possible that the product was not as ready as they first thought. A
recent announcement advised that “MNPA version 2” will be released
soon. It’s unclear to me if MNPA has already had some sales and
getting upgraded, or if the version 2 was needed for rollout. I
assume more information is forthcoming. Also, iQSTEL added that the
same engineers are working on a new project with global reach for
SoHo and Medium shops that includes Token and NFT’s.
iQSTEL’s Fintech service offerings have apparently needed some
extra work to be ready. The recent guidance is that the Mastercard
debit card, U.S. Bank account, and mobile app/website will be
launched in March of 2022. I would think they would like to get
this product started very soon as it fits in with their plans to
provide a means to facilitate iQSTEL’s EV product sales. The
Fintech product is marketed as “Global Money One”.
Valuation
As I mentioned, iQSTEL’s primary revenue stream comes from its
telecom business. Their technology divisions contributed to revenue
in FY 21 but up through Q3 21 there is not much information from
the company in the way of a breakout of divisions. For example, the
company stated that the IoT Smart Tank devices were already
delivering on revenue, but no amount was provided.
With the unofficial FY 21 total revenue of $64 million, we can
assume the greatest part of it is telecom, as the technology
products are just coming to fruition. I noted that gross margins
had improved as of Q3 21, and the overall telecom margin was 5.09%.
I also mentioned that small improvements in gross margins, applied
to millions in revenue can quicky contribute to net income.
According to Aswath
Damodaran the average telecom-services gross margin is
currently 20.75%. I assume that is a range we should expect iQSTEL
to aspire to reach. If iQSTEL reached the average and it was
applied to $64 million in revenue, then that would generate over
$10 million extra available towards net income. Disregarding other
expenses, such as taxes, that could amount to about $.07 in EPS. If
you consider an average telecom-services trailing
P/E of 37.30, then that $.07 could add $2.61 to iQSTEL’s
share value based on its current margin.
Achieving a gross margin comparable to the industry average
could take a little while, as iQSTEL is some distance away from
that now. But the company has merged its telecom operations under
one banner, and they advise that they see synergies and are making
improvements to margins. The takeaway is that any improvement in
gross margins puts them closer to profitability, or if
profitability is achieved then better margins will add to it. Also,
a 20.75% margin is a reasonable goal, as it is an industry average.
The idea is supported when considering that certain of iQSTEL’s
more mature telecom operations like SMS Miami and Swisslink
achieved gross margins from 16% to over 19% in Q3 21.
On a price to sales basis we can look at the industry average
telecom-services price to
sales ratio of 1.27, and apply that to iQSTEL’s sales of
$64 million. iQSTEL’s outstanding share count is 147,357,358. Using
the average price to sales ratio and FY 21 forecasted sales the
market cap could be $81.2 million, and the fair value for shares
based on telecom could be $.55. That is just a little over today’s
share price of $.485. That valuation may help explain the current
market price, but it overlooks key points which are the rest of
iQSTEL’s business divisions, and the current size of the
company.
iQSTEL provided FY 22 guidance late in 2021. The projected
revenue for 2022 included a gain from $64 million to $80 million in
telecom revenue. In addition, iQSTEL provided its first projection
for its non-telecom services, with a $10 million forecast.
Altogether iQSTEL is forecasting $90 million in revenue for FY 22.
An interesting development though is that January sales are
reported at $6.7 million, and the guidance is to expect comparable
results for February and March. When you annualize $6.7 million you
can see that iQSTEL is already an $80 million revenue company.
While revenue can fluctuate, iQSTEL’s typical pattern is to grow
quarterly sales as seen in the graph below (including my Q4 21 and
Q1 22 estimates).
If you apply the average price to sales ratio to $80 million in
(presumed) telecom sales, you can see a fair value for telecom at
$.69. The other $10 million in sales could be a mix of Fintech and
Technology, but with technology products either already in use or
about to be, I will apply a CSI
Market technology price to sales ratio of 5.56x to the $10
million. That brings another $.38 in fair value.
It is not clear to me if the current revenue gains are owed
partly to the Smart Biz acquisition that was thought that it would
be completed in January. I have not seen a definitive confirmation.
If it does support the gain its still just as valid, and if Smart
Biz is not added in yet then it could mean just more revenue to
come. As mentioned, two acquisitions are expected to close soon and
both of those are expected to add more to the projected $80 million
revenue forecast. Also, it is reasonable that January sales could
have grown organically, as iQSTEL advised that they would be cross
selling products amongst their telecom offerings.
Markets are inefficient and they do what they do. I believe the
current market share price is just about right when only
considering last year’s sales, and if you totally disregard
everything the company is doing that is not in telecom. That may
even be fair for 2021, as non-telecom business was not much a
factor in revenue.
The share price did rise and pull back though. Currently it has
been consolidating around the $.50 level. But the company is
already bigger than it was in 2021, and per guidance, their
technology and Fintech products are ready for imminent rollout. I
see the current fair market value at $1.07 ($.69 + $.38).
Risks
The company provides a full list of risks in its annual filing.
I recommend reading that in its entirety, but I will add a few
notes.
I would reevaluate my investment thesis for iQSTEL if there was
significant loss of business, failure to achieve profitability in a
reasonable timeframe, and failure to achieve better margins. I
would also reevaluate my thesis if I saw significant dilution
occurring that does not bring in equal or better value to the
company. For an investment in iQSTEL, I expect shareholder equity
to continue to improve over time. At this point I believe the
company has made steps in the right direction regarding these
issues.
Final Thoughts
iQSTEL has shown determination for at least several months to up
list their stock into Nasdaq. They added independent board members,
cleaned up their balance sheet of all toxic debts and warrants, and
they have demonstrated a record of gains toward profitability.
Their up list in OTC tiers was both a sign of strength to
qualify and an effort to reach more investors to help meet what is
the only remaining criteria to achieve to list on Nasdaq, which is,
the minimum bid price qualification.
iQSTEL has continued to contend that they expect to reach all
Nasdaq qualifications, including minimum bid requirements through
organic growth efforts. They expect this to be accomplished in the
first half of 2022. The company did raise $2.75 million from equity
near the end of 2021, but this was toward meeting the equity
requirements for Nasdaq, and perhaps this is another sign that they
are so close to being ready.
My current fair value at $1.07 is based on what I can see today.
It can be easily and justifiably raised substantially with more
positive results including their achieving profitability. I already
mentioned that telecom alone could raise the fair value of the
stock with industry average margins. I could see that setting
conditions for over $3.00 in value just for the existing telecom
revenue alone, and it continues to grow. Even the 70% or so CAGR
revenue growth could warrant a much higher P/E, one well above the
industry average.
Also, the EV, IoT device, and Fintech divisions can bring
substantial more value. A large rollout of Smart Tank devices or a
popular customer response to the EV motorcycle could involve
substantial revenue forecast upgrades, and those are high margin
products.
iQSTEL recently expressed a goal of reaching a $1 billion
valuation and beyond. Most companies have dreams, but iQSTEL has
grown from a company with under $10 million in revenue in 2017 to
pushing $100 million in revenue by 2022. They may even make it
there, $90 million is just a forecast and they have over-delivered
in recent years. If they have their M&A funding in hand and
reach profitability then the potential is there for an even more
rapid growth phase, and maybe a chance at those valuation goals.
The current price to sales multiple, being under 1x sales, based on
current annualized sales revenues, may leave lots of room for
upgrade. A $1 billion valuation on current shares implies a share
price of $6.79 a share.
I believe there is interesting potential and I hold a
substantial position. It is an OTC stock, speculative, and subject
to pitfalls. But I believe that iQSTEL is undervalued on current
business and receiving no value in the market for some interesting
and potentially lucrative products.
Disclosure: I/we have a beneficial long
position in the shares of IQST either through stock ownership,
options, or other derivatives. 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: Please note that I
am not a financial advisor. The article should not be considered as
a suggestion to buy or sell this or any other stocks. Consider this
one source of a full range of due diligence you should undertake
but is entirely my personal opinions. It is strongly recommended
that you consult an experienced, qualified, and registered
investment advisor before trading.
Source - https://seekingalpha.com/article/4495418-iqstel-readies-for-nasdaq-listing-bid
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