CLFD - Clearfield Inc.: Growing While Minimizing Risk

Summary

• Clearfield has tripled its revenue in two years, focusing on providing fibre connectivity solutions to Tier-2 and Tier-3 telco customers targeting community broadband in underserved rural areas.
• The company expects to grow by 40 to 45% for the fiscal year 2023.
• The market reacted poorly to the company's announcement of $120 million public offering, but fundamentals and growth prospects remain strong, along with analysts increasing the price target estimate to $132.75.
• Cautious of the impact of the growth on further capacity requirements and company culture, the impact of alternative technologies and increased costs.

Not too long ago, Clearfield, Inc. ( CLFD ), a fibre broadband connectivity and management company, was a struggling micro-cap stock with a market cap of $10 million and a stock price under a dollar. Revamped in 2008 and under the leadership of CEO Cheri Beranek, it has grown over the last fourteen years by focusing on smaller-scale community broadband in rural areas. It has expanded its business organically, maintaining profitability and a strong balance sheet. In the previous two years, the company's growth has been sensational. In ten years, investors have been rewarded returns of 1,837.70%.

CLFD has grown without high debt intake and little risk-taking; although less well-received by the stock market, its recent offering , is a historically rare public money-raising effort to increase funds for future growth. The market is rapidly expanding, and CLFD has scalable plug-and-play solutions that cut out highly skilled labour requirements, saving time and money for its customers. With billions of dollars of untapped potential and a steady footing in the fibre optic market, laying the foundation for future 5G networks. This company has a considerable backlog, increased capacity, and a growing customer base, and the traditionally conservative management team have set high growth expectations going into 2023 and beyond. Therefore, investors may want to take a bullish stance on this hugely exciting company.

Overview

In my previous article, I give an introduction to CLFD . CLFD provides service providers with scalable equipment to connect homes and businesses to intricate fibre networks. It has over 1200 customers, generally focused on neglected smaller and rural communities. CLFD's strength lies in its ability to give service providers less labour-intensive scalable plug-in solutions that save time and money. The company's growth story has been incredible; in 2008, it was an offshoot of a company that had raised $40 million during the dot-com market but had never made any profits. CLFD, as we know it today, built itself up over the last 14 years through solid operational performance and maintaining a strong balance sheet. The company has seen tremendous growth, from $93.1 million to $270.9 million in revenue in two years. We see the company go from a micro-cap stock of $10 million at a stock price of $0.86 to a small-cap stock of $1.461 billion at a stock price of around $100 and deploy millions of ports of connectivity across the country.

Growth Catalysts

One key strength is that CLFD allows its customers to make good money. Plug-and-play solutions save service providers high labour costs, and they can take on more end customers than with competing, more complex solutions. This has been a winning recipe in an industry with a significant labour shortage . Furthermore, it aligns customers' capital expenditure according to the number of subscribers. The mechanism allows service providers to be the first fibre available to their customers.

Secondly, the sector growth is heavily driven by public and private investments to increase connectivity across the US, such as the $42.5 billion BEAD program and Google Fibre project . There is a severe urgency to connect homes which will generate revenue, and CLFD's quick and scalable solution is a front-runner in remote areas for service providers. There is a vastly untapped market, with almost 42 million people needing broadband in the USA.

Thirdly, the company is increasing value by creating portfolio customers that use products on an end-to-end basis, so that service providers can recognise the labour savings connected to this. Revenue per home is around $50. However, for homes connected , there is a revenue opportunity of $250.

Fourthly, CLFD invested in 2020 and 2021 for multifaceted growth opportunities from training facilities such as its Clearfield College to capacity and growth in international markets. It increased its capacity, tripling its footprint in Mexico and doubling its footprint in the US market. It does not only grow in square-foot capacity, but by leveraging suppliers. The company can increase growth within the Mexico facilities, where the workforce is 800 people, with a further growth expectation of 50% for 2023. The Nestor acquisition will bring a new line of manufacturing capabilities into this facility.

While it has been focused on community broadband and smaller opportunities, it is open to bigger opportunities due to its ability to scale to larger companies. The acquisition of Nestor, through debt financing, is a step into more significant opportunities. The company recently raised money to accompany the fast-paced growth. This could include increasing capacity, with a potential capacity in Finland.

Financials

CLFD is the type of growth stock you want to go after. Since COVID-19, the company has had a CAGR of 70%; this last financial year of 2022, there was a growth rate of 92%. However, this is paired with a solid business model and strong fundamentals.

While growing, it has also improved its bottom-line performance, increasing profits, EBIT, and EBITDA margins.

Below, we can see a comparison of net sales by market and the composition of net sales for year-end 2022. Half of the business is through distribution via 1000 customers, and the other half, accounting for roughly 200 customers, is direct business. All customers are serviced through the technical team.

With this growth rate, CLFD experienced has experienced more significant cash churn and raised public money for the first time since 2007. It has a negative free cash flow of $8.15 million. In 2022 the company made $50 million and converted a large sum into inventory for future growth and development resources required by its customers. The company also has a low debt-to-equity ratio of 0.35 and a healthy current ratio of 3.1.

CLFD is an exciting growth stock with the fundamentals to back up its performance and a clear growth opportunity ahead. Although the stock price has dropped by 13.42% over the last month, it reached an all-time high of $134.90. Furthermore, Cowen & Co. have raised their rating to Outperform with a price target of $141. As we can see below, the company has a high buy rating by various analysts and solid factor grades, although it has a high price-to-earnings ratio of 27.07.

Risks

The company has undergone a major growth period, meaning significant operational changes and adjustments. It is essential to have the proper management and processes in place under this new business phase and be aware of the additional costs, the need for more or different suppliers, and complexities that can be brought on through growth and its new acquisition. Furthermore, the industry could be impacted by new technologies such as Starlink , the satellite internet service, which could impact business in the long term. However, as mentioned by the CEO, the solution only fulfils the requirements to meet the needs of many users on the connection with lowering the performance, and it comes at a much higher price tag.

Final thoughts

CLFD has seen incredible growth over the last two years in an industry pushed on by the government and private investments to get every home and business connected. With a scalable solution critical to service providers, CLFD can continue growing through smaller rural opportunities and take on more significant opportunities in the future. The company has made a strategic international acquisition, raised public money and massively increased its capacity within its Mexican and US facilities. It has a scalable product, a growing market share and a strong management team guiding it to continue growing globally in the market with billion-dollar potential. Investors may want to take a bullish stance on this company.

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