As Wall Street focuses on the soaring fortunes of “The Cupertino Giant,” here’s an under-the-radar technology company that should get a lift as well.
The investment herd always focuses on the obvious. First, let’s look at this week’s big headline in the technology realm.
Shares of consumer icon Apple (NASDAQ: APPL) soared on Wednesday, in the wake of robust third-quarter fiscal 2017 operating results. Apple posted revenue of $45.4 billion and earnings of $8.7 billion, or diluted earnings per share (EPS) of $1.67, compared to revenue of $42.4 billion and earnings of $7.8 billion, or diluted EPS of $1.42, in the same quarter a year ago.
Now let’s look at an exciting opportunity that lies behind the headline.
In late July, InfoSonics (NASDAQ: IFON) and Cooltech announced that the companies have entered into a merger agreement under which InfoSonics will acquire Cooltech. Investors take note: Apple’s rise should buoy the prospects of this combined entity.
InfoSonics is a San Diego- and Miami-based manufacturer and marketer of wireless handsets, tablets and related electronic products to carriers, distributors and retailers in Latin America under the brand VeryKool.
Cooltech is a vertically-integrated Apple licensed partner and reseller with a retail presence under its OneClick brand. Cooltech is based in Miami, the gateway to Latin America and a convenient jumping-off point for further territorial expansion south of the border. Oneclick operates over 20 stores throughout Latin America; Cooltech operates four stores in the U.S.
Once the merger is completed, Cooltech will become a wholly owned subsidiary of InfoSonics in exchange for 62.5 million shares of InfoSonics common stock. The parties expect to close the transaction in the fourth quarter of 2017. Contemporaneous with the signing of the merger agreement, Cooltech has signed a binding financing obligation to purchase 2.5 million shares of InfoSonics common stock at a price of $0.40 per share in cash and warrants exercisable into 2.5 million additional shares of InfoSonics common stock with an exercise price of $0.484 per share.
On August 3, in an official filing with the Securities and Exchange Commission, InfoSonics confirmed its offering of 2.5 million shares at the aforementioned per-share price. In a concurrent private placement, InfoSonics also is offering to investors an equal number of warrants to purchase shares of IFON common stock. InfoSonics will devote the $1 million in proceed from this private placement to cover the costs of the merger.
It’s not just InfoSonics and Cooltech – investors are likely to see increased merger and acquisition activity this year in the cash-rich tech sector. Technology has been on a tear in 2017, outperforming the broader markets. The benchmark The Technology Select Sector SPDR Fund (NYSE: XLK) has generated a year-to-date return of more than 14%, compared to 9.1% for the S&P 500.
By combining their resources, InfoSonics and Cooltech will be well-positioned to not only exploit technology’s rise, but also the tailwinds of economic growth in Latin America.
The Latin Resurgence
After a long slump, emerging nations in Latin and South America are staging a comeback, as commodity prices rise and newly affluent middle-class consumers embrace the electronic gadgets that they associated with the good life in the West.
Factors for greater consumer spending in Latin America include widening credit and debit card usage; the spread of social media and e-commerce; rising wages; falling unemployment; and accelerating gross domestic product growth.
To be sure, with a market cap of about $7 million, InfoSonics is a micro-cap stock and as such, highly volatile. The stock is only suitable for aggressive investors with an appetite for risk. However, the company sports a sturdy balance sheet, plenty of cash on hand, and it’s tapping into the fortress-strong supply chain of Apple.
With a price-to-sales ratio of only 0.18, the stock is a bargain in an overvalued market where reasonably priced tech stocks are hard to find. What’s more, smaller stocks are expected to outperform the large caps this year, especially in light of the nosebleed valuations of the well-known Silicon Valley titans.
And then there’s Cooltech’s valuable relationship with Apple, the importance of which can’t be overstated.
Apple has entrenched and rock-solid relationships with resellers such as Cooltech. A large part of Apple’s stunning success over the years has been its methodically created distribution network, combined with fanatical brand loyalty and the continual introduction of new and improved products that capture the consumer’s imagination. Apple has forged a money-making machine.
Apple’s hefty revenue and earnings growth in the third quarter is unusual for a company if its massive size (market cap: $812.9 billion). That’s because Apple has been able to launce new products and garner widespread adoption for them in a way that no other company in the world can possibly match. In 2017 and beyond, the combined operations of InfoSonics and Cooltech will be in a position to take advantage of the inherent strengths that Apple has spent decades building.