RADCOM Ltd Is An Exciting Portal Into 5G Investing

Everything Is New Again

RADCOM Ltd (NASDAQ:RDCM) is a rising 5G-ready service provider for telecoms. RADCOM captivates us for its unembellished business plan, commitment to organic growth, healthy financial picture, and forward-thinking in a high-growth industry. We are among the majority of Wall Street analysts along with 7 of 8 Seeking Alpha analysts-writers assessing RADCOM as being a strong buy potential opportunity at this time.

5G Industry

5G is a nascent but rapidly expanding segment of the IT sector in the Application Software industry. Four years earlier, Brookings wrote an enthusiastic treatise about the future of 5G for businesses and consumers, particularly pointing out 5G's potential claiming,

Fifth-generation (5G) mobile networks are expected to be the next big leap in mobile broadband. Peak download speeds as high as 20 gigabits-per-second will enable specialized tasks like remote precision medicine, connected cars, virtual and augmented reality, and a wide array of internet of things ((IoT)) applications.

A study released in April 2023, "From 5G to Beyond 5G: A Comprehensive Survey of Wireless Network Evolution, Challenges, and Promising Technologies," by professors at The Islamia University of Bahawalpur in Pakistan, argues that 5G is the solution to connectivity issues for trillions of devices. A 5G network can maintain a 1000-fold capacity gain and 10 Giga Bits per second delivered to a single user; it also assures quality-of-service, higher spectral efficiency, ultra-reliable, improved battery lifetime of devices and massive machine-type communication, and can manage huge traffic loads and high amounts of resource consumption.

The ultimate goal of RADCOM clients is to expand broadband to everyone everywhere. To scale a 4G and 5G fixed wireless access business with this capacity demands impeccable customer experience monitoring. RADCOM provides its clients with the capability of tailoring user experiences relevant to them; this can only be accomplished through automated assurance solutions. RADCOM's operations let clients understand "what is happening inside their networks" and can "pre-empt problems and troubleshoot before serious issues occur."

Risks To Rapid Implementation

The most compelling risk to 5G expansion in most countries is the lack of any single "authority in controlling the expansion of wi-fi communication technology as the de-facto connection technology among businesses…"

A second risk is emerging from politics, though connectivity and service are progressing in a transitional phase anyway. A wing of European, Israeli, American, and Canadian politics fears that 5G connectivity can result in an electronic government that dominates the political thoughts of users.; others believe it will enhance democracy by greater inclusion. Regardless, demand is exponentially soaring.

Third, 5G development has slowed because the U. S. opposes Israel's collaboration with China's largest tech firm in building and operating 5G for security reasons. The ultra-religious parties oppose the upgrade to 5G in Israel because their constituents will have to buy unaffordable replacement devices; it might require them to purchase smartphones which the ultra-religious forbid their constituents to own.

A fourth risk investors have to consider resulting in 5G slow growth are global extrinsic factors: the impact on 5G development and implementation from inflation, a possible global recession, lower wage incomes, supply chain issues, the softened market for IT and software and more, as detailed in a new report by McKinsey. The stagnation in shares of SPDR S&P Software and Services ETF (XSW) reflects the risks McKinsey details for a troubled industry. The ETF shares are +46% over 5 years but only +4.6% over the last 12 months; most of that increase occurred YTD (+9.6%).

Imagine, RADCOM finds itself beset by all these risks. One year ago, RADCOM shares sold for $11.50 each. RADCOM shares fell ~25% YTD. Since the start of the invasion of Israel by Hamas terrorists on October 7, '23, RADCOM shares had slipped ~25% to $7.80 each when it last traded on October 31. In July, the shares sold for $10.80.

RADCOM and other Israel-based stocks suffer from the risks of war. War slows telecom growth. In Israel, the shekel weakened, the national budget is applied to winning the war not innovation or building telecommunications infrastructure for the public; there are increases in borrowing costs for investments, and the war is creating creeping labor shortages across industries. 15% of Israel's telecom labor force went poof because telecom employees are young and are called up for military service.

We have written about others with much larger market caps but despite the terror and political attacks on Israel, in our opinion, Israel-based stock prices are holding up better than most analysts expected. We expect them to follow previous moves and roar up after hostilities end.

Company Profile

It is our opinion, RADCOM's business model is what makes this an excellent investment potential opportunity. The model relies on a continuous cash flow with recurring revenue. Management has a slow but steady growth perspective; they are not rushing to build by M&A without first building a strong foundation for the organic growth of RADCOM.

RADCOM headquarters in Tel Aviv and like some 111 other Israel-based companies trades on an American stock exchange. RADCOM is a small-cap (~$119M) business based in Israel. It ranks 52 out of 110 Israeli companies trading on an American stock exchange.

RADCOM Ltd's core business is "in cloud-native, automated service assurance solutions for telecom operators running 5G and 4G networks. RADCOM delivers real-time network analysis, troubleshooting, and AI-driven insights..." That includes mobile and fixed networks, 5G, long-term evolution, voice over LTE, voice over Wi-Fi, IP multimedia subsystem, voice over IP, and universal mobile telecommunication service. It sells its products directly and through distributors and resellers worldwide.

Upsides For Investors

RADCOM offers investors the opportunity to lift their portfolios during the temporary slide in RADCOM's price. But at war's end, Israel's resilient and vibrant economy is likely to return to its former prominence. That's been the pattern, as we have demonstrated in our previous articles for S A. Moreover, stocks in the networking industry, computing, and tech sectors seem to be turning around, as we close out 2023. They are outperforming the S&P 500.

RADCOM revenue was up and EPS grew in Q2 '23. In August, the company's report beat estimates. It reported in the first 6 months of 2023 total revenue was $24.4M compared to $21.8M Y/Y. GAAP net income for the first six months was $1.4M, or $0.09 per diluted share, compared to a GAAP net loss of $1.8M Y/Y. GAAP net income for Q2 was $0.8M, or $0.05 per diluted share, compared to a Q2 '22 GAAP net loss of $1.3M, or a loss of $0.09 per diluted share.

RADCOM beat quarterly estimates 8 out of the last 9 quarters. The grade for Revisions from S A is a stellar A- adding to our overall confidence going forward. We forecast that Q3 '23 EPS will be closer to $0.10 versus Q3 '22 of $0.06 with revenue expected to continue increasing. Short interest is negligible. RADCOM's earnings report is scheduled for November 8 '23.

The consensus about RADCOM is positive. The Factor Grades for the 3 top factors, valuation, profitability, and revisions are all top-notch. Growth and momentum are slow but steady while we estimate earnings will grow slightly over 10% for the next 2 years. As revenue grows the whopping 72.2% gross profit margin will stimulate profitability.

RADCOM stacks up well in comparison to its peers. Notice it sports the second-highest market cap and operates with nearly the fewest employees, one measure denoting management efficiencies:

Total debt is $1.87M but the company holds +$78M in cash. Between the cash on hand, $6M the company generates in cash from operations (2022), and free cash flow of $5.8M or $0.40 per share, RADCOM appears in excellent financial health. Management might borrow more money to expand since the company shows good liquidity to cover financial obligations.

The company recently made its first purchase. It bought a small mobility analytics company with $46M in revenue. It uses AI and Machine Learning "to deliver advanced insights to help telecom operators improve subscribers mobility experience."

Ownership of RADCOM is in the hands of corporate insiders who hold 24.25% of the shares; institutions own +40% and the public $~35%.

Takeaway

The decline in share price is from a combination of downward pressures on the networking, IT, and application software industry exacerbated by Israel's internal economic woes and the war. It is all making investors skittish. The war might require investors to hold the stock for 2 to 4 quarters before RADCOM offers the good return we anticipate. RADCOM does not pay a dividend.

We see this as an opportunity for retail value investors since a company like RADCOM is on the cutting edge of a mammoth industry that will take networking, computing, and software into the new age. RADCOM's first M&A purchase was intentionally to solidify its offerings with AI and ML. We think smart investors will, like us and other analysts, consider RADCOM currently a bargain.