Smart Play on Smart Watches for Smart Parents

Spacetalk is an Aussie company with a very cheap valuation and many ways to win. They were initially a software company providing schools with messaging services. This segment alone has sales of nearly $3mil – contracted, reliable sales that are likely to produce software-type FCF margins of 25+% once they shift focus onto profitability. Let’s call it $1m in FCF for simplicity, and let’s give it a very reasonable multiple of 20x because it’s growth is in the single digits. That segment alone is worth $20m right? The entire company is being valued at $26m – so let’s see what the other segment is that’s going to fill in the other $6m. Spacetalk sell smart watches for kids – it makes and receives calls (only with authorised numbers), location tracking, and SOS – all for $250 upfront, and then $6/mo. It’s the perfect intermediary between FitBit and iPhone for the parents who don’t want to fork out $1k so their child’s brain can rot online. They had $6m in device sales, and $2.3m in subscriptions in the most recent HALF-year. Subscription companies with mediocre growth tend to have sales multiples of at least 10, and its growing at 73%. Throw in the fact that they’ve only scratched the surface on the total number of kids in Aus who could be potential customers, and this company has a lot of runway ahead. They’re also expanding into similar watches for the elderly and the adventurous. Many are spooked away because they feel Apple will dominate the space, but not every parent wants to pay $700 nor to have their child with too much freedom so young. All up, you’re paying a sales multiple of 1.5x for a company with solid growth, software profits, subscription reliability, and a lot of room to run as children become the new frontier of smart watches. The stock boomed on a deal with Telstra who’ll be selling the watches in their stores, so maybe wait for the hype around that to cool off before jumping in. Either way, it’s growth at a very reasonable price and at only a $25m total company value, a lot of upside potential.