BSQUARE Corporation (NASDAQ:BSQR) is a micro-cap stock with a market cap of $58 million and is active in the highly competitive software solutions industry. It provides these solutions along with related engineering services to companies that develop smart, connected systems.
Negative sentiment among investors
After having lived through a short lived period of optimism surrounding its stock between 2014 towards the end of 2015 in which the share price more than tripled in value, the company has seen its share price tank over 65% since November last year. Until a few days ago the sentiment surrounding the stock seemed like it couldn't get any worse. A quick look at the results tells us why. In 2013 the company generated revenue worth $92 million and an EPS of $-0.47. The following two years BSQUARE improved its results, causing revenue to grow to $107 million and EPS to a positive of $0.51, which unsurprisingly resulted in a feeling of relief among investors and a major shift in sentiment.
Unfortunately this feeling of euphoria was short lived when it became clear that the improved results were unsustainable. After reaching its high of almost $13 per share in 2015, the stock descended and even traded below $4 per share for a brief period. The current ttm revenue has declined to $99.6 million, resulting in an EPS of a mere $0.21. The poor performance of BSQUARE has left a lot of investors wondering if the stock will ever regain its upwards momentum.
Personally, I believe that the sharp decline we have witnessed in this stock price has created a wonderful investment opportunity. Although it is true that results have been far from great in the recent past, management recognizes this and is well underway to change its business in order to regain profitability in the not too distant future. I'm talking about the new DataV, an actionable data solution for the IoT market that includes software products, applications and services that turn raw device data into useful, meaningful actionable data.
It's expected that this transition to focus on a more profitable business may result in net losses in the coming quarters. Besides the short-term risk as the result of a shift in focus, we must also keep in mind that BSQUARE's future success depends on that of DataV. If the company fails to succeed in acquiring enough customers for DataV to make its new business work, chances are that the stock will decline a lot further before another turnaround opportunity might occur. I believe that we will find out soon enough if DataV will be a success or not. All we have to do is keep track of what management says about new DataV-customers and the prospects for growth in the next few earning calls.
Less risk than investors might think
In the meantime BSQUARE has a healthy balance sheet with a strong $32 million in cash (over 50% of its market cap). Stockholders' equity is worth $39 million with a total liabilities of just $19 million. On top of this management has been restructuring its business in order to save costs as well. It's expected that this will result in an annualized cost reduction of $2.6 million. Because of the healthy balance sheet and efforts to reduce costs, the short-term downside is limited. A further decline would lead to the stock trading close to the amount of cash it has on hand. This is part of what I like so much about this stock: low risk with the potential of high return on investment.
At the release of the Q3 results, management stated: "We continue to see a strong customer pipeline, and in fact received a $4.8 million DataV booking from a new customer after the close of the third quarter." It was also stated that gross margins for DataV are expected to be around 70%, a huge improvement of the 18% gross margin we're seeing right now. Shifting the focus to DataV therefore seems like a wise choice. The challenge right now is to grow the number of DataV customers, which the company will work hard for the coming quarters.
The stock currently trades at a P/E of 22 vs an industry average of 70 and a P/S of only 0.7 vs an industry average of 5.0. This seems reasonable if we think about the poor financial performance of the recent past. But considering the potential of DataV, along with the current P/B of 1.45 and a P/C of 1.85 without any debt, it seems like a low valuation for a stock with turnaround and growth potential.
The most important thing with this stock is being on the lookout for an increase in DataV customers. The low valuation could cause the stock to surge when combined with the good news of expected earnings growth. Just with this improved sentiment I believe the stock could go up to $8 per share. After the release of the most recent quarterly results earlier this month, it seems like investors are starting to become more positive about its prospects since the stock has seen nothing but gains.
While I feel that this stock offers a great investment opportunity, you have to know what type of risks you would take when actually making an investment in this stock. Since its market cap is less than $100 million with low trading volumes, the stock price can be very volatile. When investors are unprepared for something like this it could cause much bigger losses than anticipated. So make sure you understand the risks associated with micro-cap stocks before you decide to make an investment.
Disclosure: I am/we are long BSQR.
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.
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