Rally On, Traders!
Tech support doesn't get any easier over time. We get smarter but our devices get more complicated so fast that it's hard for the typical busy person to keep up. That's why a dedicated IT service provider like Nerds On Site Inc. (NERD) is so interesting from an investment point of view.
After all, any tech upgrades require retraining and a learning curve. Apps need to be installed. Things can break. The more you spend on new systems, the more mission critical it is to fix them FAST and RELIABLY.
NERD has built a thriving operation across Canada keeping the computers running so the country can take care of business. You might know their customers already . . . "little" companies like Canadian tire.
The model is simple and lends itself to organic expansion. NERD finds independent contractors with the skills, taking a cut of 37-50% of all service fees plus a volume bonus. The contractors like having support at their back and a steady stream of customers. NERD rakes in over $8 million a year.
That's decent money for a little company like this that still trades well below $1 per share. When your market cap is barely $19 million, it's par for the course.
After all, the famous Geek Squad down in the States only had a $3 million run rate when gigantic Best Buy bought it out for roughly that same amount of cash. That was back in 2002. Nowadays "services" is tracking a $1.6 BILLION top line for the computer retail chain.
That's something like 48% compounded annual expansion, year after year, decade after decade. It's a literal gold mine for the parent company, often attributed in the press as the way forward as electronics retail grapples with the Amazon menace. Support is the key. If they can help customers keep their computers running, they'll keep the customers.
NERD has a very similar model but it's still at the early end of its agenda. They're in 10 cities now. At gross margin of 29%, they can flip to profitability by maybe doubling their profile.
Right now each of their "nerds" is booked. He (or she) is booking around $72,000 in service and taking home above $50,000. Not bad at all.
But there's a sleeping giant to the south. NERD just opened a few pilot branches in Arizona and Florida, collecting over 400 new NERD applications in its first week of marketing. The initial objective there is modest, practically experimental. What if they could start just TEN branches down in the States?
That's double the existing footprint. Once those nerds fill their calendars, that's double the revenue. Normal market math suggests NERD would need double the market cap AT LEAST to keep up with that fundamental trend.
After all, growth generally commands a premium because the company is expanding fast into its valuation. In that scenario, either the stock needs to rise or the multiples contract, ultimately beckoning value-conscious investors. That's not hype or any kind of hypothetical. It's simply how market math has worked for generations.
Long story short, NERD CEO Charles Regan just noted "102% revenue increase overall with USA growth, quarter over quarter."
DOUBLE the revenue. SEQUENTIAL growth. If that trend continues for even a little while, look out! As it is, Regan is comfortable forecasting a 150% sales boom in the current year. Suddenly $8 million turns into $20 million.
On the Geek Squad scale, the valuation here needs review. After all, that company sold for 1X revenue and has only grown 1/3 as fast as the NERD. If any strategic acquirers are interested in replicating Best Buy's success, they'll need to take note.
And in the meantime, NERD shareholders share the glory. They're here before the M&A offers, barely months after the IPO. The US market is vast, with 9X the Canadian population and a whole lot of gadgets, very few of which the locals know how to fix or even maintain.
There's a lot of money sloshing around down there for a smart IT provider to capture. That growth curve can extend for some time before that market is saturated. Even up here, contract revenue is up 11% as NERD moves into Vancouver and other cities.
With one end of the business growing 11% and the other side going exponential, the sky is the limit. Management has held onto 50% of the stock. They're in this for the long haul . . . and they have real skin in the game as well as glory on their minds.
If you've got a computer problem at home, they'll pay a house call and charge you by the problem. For a business, they'll work on retainer, ensuring that you get what you need. The pitch is that NERD will reduce typical small business tech costs 25-50%.
Every new branch carries a $2,500 franchise fee. If you drive a NERD car, you basically give the company free advertising in exchange for a better split of the receivables. Management thinks that's worthwhile.
We'll see the results once those US branches start reporting their numbers. By that point, it might be too late to capture the chart in a "quiet" phase:
Happy, Happy, Happy Trading!
