Not so long ago, Avigilon Corp. was as obscure as the grainy images on those old black-and-white security cameras – the equipment the company aims to replace with its modern, high-definition digital surveillance systems.
Vancouver-based Avigilon is succeeding so well at the task, in fact, that the company's shares have emerged from the shadows to burn brightly. In the two years since the company's initial public offering, they're up more than 600 per cent. Avigilon has now joined the short list of billion-dollar Canadian tech companies, with a market capitalization approaching $1.4-billion. And it seems headed for inclusion in the S&P/TSX Composite Index, which would prompt another round of buying, this time by the fund managers who track the index.
There are perfectly good reasons for the shares' rocket-like status: The company doubled its revenue in its most recent quarter, compared to the prior year; earnings per share tripled. Gross margins exceed 50 per cent. Where once it traded at a discount to other companies in the surveillance technology industry, it now receives a huge premium, with a forward price-to-earnings ratio north of 30, depending on whose estimate you choose.
I am increasingly wary of being wary of these kinds of stocks: fast-growing companies with good products that execute well and blast through analyst expectations. It seems quite likely that shareholders will have several more enjoyable quarters.
And yet, I can't help but wonder if the future for Avigilon is as clear as the HD pictures on those cameras it's selling.
If you're unsure why digital surveillance cameras are preferable to their analog predecessors, you may still be using a VCR. Analyst Thanos Moschopoulos of BMO Nesbitt Burns says analog cameras have a resolution of 0.1 to 0.3 megapixels; many digital camera offerings go from 0.5 to 2 megapixels. Avigilon sells cameras with resolution as high as 29 megapixels. The larger the number, the greater the possible area of coverage: Mr. Moschopoulos says the Rogers Centre uses 19 Avigilon cameras, each 16 megapixels, to monitor the seats. That replaces hundreds of analog cameras.
As recently as 2008, says National Bank Financial analyst Kris Thompson, there was less than $1-billion (U.S.) of sales of "IP cameras," as they're known (IP stands for Internet protocol), and analog devices outsold them nine-to-one. Citing numbers from ABI Research, Mr. Thompson says digital cameras should outsell analog ones five-to-one by 2015. While IP cameras cost more than analog, their prices are falling. And their increased power means a large digital system can actually be cheaper than an analog one because of the smaller number of cameras necessary for the task.
Tech entrepreneur Alexander Fernandes started Avigilon in 2004 with the goal of being early to the market with an HD surveillance product. Not only did the company succeed, but it's one of the few companies that offer "end-to-end" solutions that go from the cameras on through to the software that processes the images and the hard drives that store it. Better yet, Mr. Thompson says, Avigilon's systems are compatible with any number of products, even old analog cameras. This means potential customers can "gradually shift" to Avigilon by installing the monitoring software without painfully ripping out dozens of old cameras from day one.
"Avigilon is like the Cisco of the enterprise telephony market," Mr. Thompson says, comparing the current environment to when Cisco sold Internet-based telephone solutions to large businesses several years ago, winning share from the incumbent players. Avigilon is even better positioned, he argues, because of how its products work well with other companies' offerings.
Speaking of Cisco, however: The giant entered video surveillance in 2007 via acquisition with an eye to the large market opportunity. Mr. Moschopoulos says Cisco "appears to have had remarkably little traction" in part because its cameras lag the competition and its software hasn't kept pace.
Avigilon is lucky that Cisco, or other well-funded possible competitors, have botched the opportunity so far. Will that luck continue? Many analysts refer to the industry as "slow-moving," with no clear competitor emerging with an "end-to-end" product in the near term. Yet they also note Avigilon has no North American patents on its technology.
So far, analysts have struggled to keep pace with Avigilon's share price. Most raised their 12-month target prices to the low $30s (Canadian) in early November after the company's earnings; the shares closed at $31.99 Wednesday. Investors are expecting more blowout reports in the coming quarters. And that is indeed what might happen.
Expect, however, that competitors in the video-surveillance field – and there are roughly two dozen, by some estimates – are already taking note of Avigilon's triumphs and will try hard to replicate them. And if they're successful, Avigilon's long-term picture may get a little fuzzy.