AudioEye Inc. (NASDAQ: AEYE)
Date: 12/1/20
Price: $18.74
Market Cap: $187.8 million
This is very much a speculative bet. My investment in this stock is based on a potential growing trend, significant ownership by management (although not an operator and not a permanent solution, more on that below), and significant revenue growth along with increasing margins. With that out of the way, it’s time to discuss the company, its market, valuation, and investment thesis.
COVID-19 has accelerated all the trends that were previously in place. The most significant trend is the increasing presence of the internet in our lives, in all forms. Life going forward will continue to being increasingly interwind with the internet. But what about those people with disabilities that have difficulty accessing and using the internet? Specifically, people with visual and hearing disabilities. This is where AudioEye (AEYE) comes in.
AEYE builds software that companies, and developers use to make their websites accessible to those with disabilities. People with visual disabilities use screen readers and other tools to interpret what is being shown on a screen. The screen reader can only make an accurate translation if the code running the website is properly designed to be read by screen readers and other tools. If an individual is color blind, they need to be able to adjust the screen to accurately reflect colors. If an individual is blind, the alt text of a picture needs to accurately describe it so the screen reader can interpret it for its user. There are many other examples of how people with disabilities need dynamic websites that can adjust to their life. (visit https://www.w3.org/WAI/people-use-web/user-stories/ for more examples).
Because websites, especially those that are content or retail based, are constantly changing, having a team of people dedicated to constantly updating the website to make sure it is accessible to those with disabilities is onerous. AEYE has built software that automatically scans and analyzes code to make sure it is accessible. The software can then automatically correct code or guide a programmer through corrections. For enterprise level customers, AEYE will work directly with the company to buildout website accessibility. These services are billed monthly, thus making AEYE and Software as a Service (SaaS) business model company. The company also does one-off projects such as making sure PDFs and apps are usable by those with disabilities. But those services will not be the growth drivers of the company.
Market
If you do not have a disability, it can be difficult to see the need for this service. But 15% of the U.S. population lives with a disability that creates a limitation for a complete online experience. As the internet becomes a more intertwined part of our lives, the inequality that is created by the disability grows larger.
The Americans with Disabilities Act (ADA) was passed in 1990 when most of the population did not have the internet. There are no federal requirements that specifically address designing the internet for people with disabilities. The World Wide Web Consortium (W3C), the same group that created the guidelines for HTML, CSS, other internet protocols, have created guideless for internet accessibility, but they are not federally mandated.
Title III of the ADA “prohibits discrimination on the basis of disabilities in places of public accommodations, commercial facilities, and private entities that offer certain examination and courses related to educational and occupational certification.”[1].
There is yet to be a federal law that defines whether the internet is a “place of public accommodation”. Because of this and the lack of federal guidelines related to internet accessibility, there has been a growing number of lawsuits related to ADA Title III.
The most significant case was in 2019 when the Supreme Court rejected to hear an appeal from Dominos when it lost a lawsuit filed by Guillermo Robles, a blind man, claiming that he could not access the company’s website or app.
The rising number of lawsuits and lack of formal regulation regarding internet accessibility creates a growing risk for companies. Even if the Biden administration does provide some more clarity around internet accessibility, which is expected, either scenario is a positive for AEYE.
Part of the value AEYE offers is that it makes sure a clients’ website meets W3C guidelines. The company also tests its clients’ websites to make sure the website is fully functional for those with accessibility needs. Those tests are performed by individuals with and without disabilities.
Company History
The recent history of this company is not pretty. It is on its third CEO in two years, was a “going concern” by its auditors in its 2019 annual report and is yet to generate a profit. But things are starting to turn around.
AEYE previously focused exclusively on enterprise level customers. While the billings for working with an enterprise level customer are large, the sales are tough to win and the engagements are long. It is a business strategy that does not scale very well for this type of product. The company recently launched new offerings that cater to small and medium business leveraging its software so that most if not all accessibility customization tasks can be automated by the software. It has also partnered with the largest CMS companies (Shopify, Wix, WordPress, Squarespace, etc.) to sell its product through the respective marketplaces.
This strategy shift has increased the number of customers the company serves from 6,800 at the end of 2019 to 22,000 as of the third quarter of this year. The company has also increased monthly recurring revenue from $1.2mm to $1.7mm and increased gross margins by 12 basis points. Overall revenue has grown by over 100% almost every year since 2015.
The current CEO is an investor (the company’s largest) and has decided to take a $1 salary and will be compensated with stock if the company hits certain revenue growth and stock price appreciation targets. He has moved the company’s software development headquarter from Atlanta to Portland and upgraded the executive team with individuals who have had previous success managing fast growing software companies.
Valuation
The market has caught on to the company’s turnaround and growth potential. The stock is up 300% this year and trades at an over 10x multiple to annualized MRR (fully diluted). While there are many other SaaS companies that trade at a much higher multiple, those higher multiples have been earned through consistent execution.
The Total Addressable Market (TAM) for this company is massive. And if internet accessibility becomes a more prominent issue in the near future, AEYE is sure to benefit.
This is a speculative bet. If the company faulters in its execution, the market decides it doesn’t need its service, it can’t increase operating margins and become cash flow positive, or the world figures out another way to address internet accessibility, I will have lost this bet. But the upside is very big, and I am willing to take the bet given the risk/reward.
[1] https://corporate.findlaw.com/litigation-disputes/americans-with-disabilities-act-title-iii-highlights.html