American Virtual Cloud Technologies (AVCT) gives investors two ways to win. The company has been a SPAC (Special Purpose Acquisition Company) for the past three years but recently acquired IT services provider Computex. AVCT's SPAC financials are what appear in the company's latest SEC filings and on financial websites; Computex's operating results are not yet included. AVCT was not a particularly large or well-followed SPAC in the first place, so there is a short-term opportunity to buy a solid operating company that screens terribly before the rest of the market catches up. AVCT management has experience growing and selling small companies, so investors with a longer time horizon can buy the company as a growth play if they believe management will be able to add value to Computex over time.
A Quick Note on Volatility
When I started putting this article together, AVCT traded at a market cap of $55 million. At the time of this article being submitted to SA, the company has jumped nearly 24% to a market cap of $68 million. On the other end of the spectrum, AVCT's market cap was over $90 million as recently as June 12th. At the time of submission, I believe the investment thesis for the company is intact, but please adjust expectations accordingly if the stock makes a major move before this article is published.
AVCT as SPAC
AVCT began as Pensare Acquisition Company in 2016. The company was created by a number of executives from MasTec (MTZ), in partnership with private equity industry veterans, to look for an acquisition in the wireless telecommunications space. Notable members of management included CEO Darrell Mays, former company president Robert Willis, and former CFO John Foley. All three were involved with nsoro, a turnkey wireless installation services provider founded by Mays in 2003 and sold to MasTec in 2008. All three remained affiliated with MasTec to varying degrees after the acquisition and helped grow the company's communications division revenue to $2.3 billion and EBITDA to $250 million by 2016. Management has been shuffled since the SPAC was created, but Mays remains CEO and Willis continues to be a consultant to the company. Between the board of directors and a small group of "special advisors", leadership has founded six companies and had four of them be acquired (source: Company 10-K).
It took the company nearly four years to find a business they felt comfortable purchasing and ended up slightly outside their initial target area, acquiring IT services company Computex in April 2020. I appreciate that management was willing to wait to find an appealing company that fell within management's circle of competence, rather than feeling compelled to rush into an acquisition they were not comfortable with. Although Computex is not a telecommunication company, management has direct experience running an IT services company, giving me confidence that management adequately understands the industry.
Computex Business and Financials
Computex's financials are not yet incorporated into AVCT's quarterly and annual reports, but they can be found in an S-1 filing that the company submitted at the end of April. Computex generated just under $90 million in revenue in 2019, with the majority coming from hardware sales and from within the United States:
(Source: S-1 Filing)
The "Services" portion of revenue is comprised primarily of the creation and maintenance of private cloud solutions for small to mid-sized businesses. Given that management chose to rename the SPAC to "American Virtual Cloud Technologies", I suspect the Services division is the main area of interest for management and likely where they see the most room for future growth.
Gross margin was only 28% in 2019, with the company posting a $4 million net loss for the year. On the positive side, the company generated over $4 million in free cash flow in 2019, $3 million in 2018, and $4.5 million in 2017. Margins are not provided for each operating segment, but I suspect the reselling of hardware provides lower margins than the services segment. There is certainly room for improvement on the operating front, but the hope would be that new management will be able to make some changes to boost margins and take the company to the next level, with the company's ability to generate free cash flow acting as a small margin of safety. It is worth noting that Computex's founder and CEO Sam Haffar left the company in May of 2020, just five weeks after the acquisition closed. It appears that he left on good terms.
The Investment Opportunity
AVCT has appeal both as a short-term trade and a long-term investment. In the short term, I believe the company will draw more investor interest once they begin reporting Computex results in their financial statements. If you look up AVCT on most major financial websites (SA included), the company looks like it has limited revenue, no earnings, and negative cash flow. To algorithmic investors and those that use screens to source ideas, AVCT isn't going to be on their radar until the company files their next 10-Q. As discussed above, Computex isn't a phenomenal business, but they do generate consistent operating cash flow and might be appealing to more investors once their operating results are properly analyzed. At the very least, AVCT will screen better than it does today, which could act as a catalyst for a rapid rise in the company's share price.
In the long term, AVCT is a bet that management will be able to leverage their collective years of experience to improve the Computex business and/or sell it for a substantial profit. This is more of a bet on the intangible value of effective management than it is on Computex in particular, but the company is starting off on solid footing and is operating in a growing industry. I have less comfort making an exclusive bet on management quality, but I know other investors are better at this type of analysis and I would be curious to hear from them in the comments section.
Conclusion
There is a scene in the movie Margin Call where Jeremy Irons' character says "There are three ways to make a living in this business: be first, be smarter, or cheat;" I believe AVCT offers a rare opportunity to be first, or at least early. Now that the company owns a stable operating business that has been extensively vetted by management, I think AVCT will draw more interest from investors than it has over the last three years and that the interest will be positive. Computex's normalized FCF supports a market cap of about $58 million (assuming a 15x multiplier to normalized FCF), limiting the theoretical downside to about 15%. A re-rating of the company based on updated financials and the potential for long-term growth offer substantial upside from current levels. AVCT might feel too much like a trade (rather than an investment) for some, but I think the risk/reward ratio is favorable and the company is worth considering.
No Called Strikes Investing
I'm a big believer in the idea that there are "No Called Strikes" in investing. I put a lot of companies in the "too hard" pile, but I swing big when I find a great investment idea.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
This article is not financial advice, it is only an expression of my own opinions as an individual investor.
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