The potential superstock of the week is Data I/O Corporation (DAIO) . DAIO helps enable the digital world by designing, manufacturin...

Weekly Superstock Scan 8 May - 12 May 2017: Data I/O Corporation (DAIO)

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The potential superstock of the week is Data I/O Corporation (DAIO).



DAIO helps enable the digital world by designing, manufacturing, and selling programming systems to global electronic device manufacturers. Data I/O’s programming systems are used by the world’s leading manufacturers, programming centers, and contract manufacturers, to program integrated circuits. DAIO's largest customers are heavy users of programmable semiconductor devices and include original equipment manufacturers (OEMs) in automotive electronics, consumer electronics and Internet of Things (IoT) and their programming center partners, wireless and electronic manufacturing service (EMS) contract manufacturers.


They operates in one single segment, and their products have both an upfront solution sale and recurring revenue elements. Adapters are a consumable item and software and maintenance are typically recurring under annual subscription contracts. Equipment sales, adapter sales and software and maintenance sales contributed 66%, 25% and 9% of sales in 2016 respectively.

Technical


DAIO has been trading in the $4.50 to $5 range for most of February to May 2017. Last week, upon release of 1Q2017 results, price surged from $4.80 to close at $5.98. The weekly volume 883,000 shares, approximately 5 times its average weekly trading volume.

Fundamental



Including the current quarter, DAIO reported 4 consecutive quarters of year on year EPS growth

Some highlights from the first quarter results include a multi-year high revenue and bookings for the first quarter, improving margins and increased backlog.

Growth of Electronic Systems in Automobiles

Due to growing demands for instrument clusters and infotainment systems, as well as Advanced Driver Assist Systems (ADAS), programming requirements for automotive applications are rapidly increasing. DAIO's programming systems are well positioned to serve this growing market and hence DAIO has managed to serve eight of the top nine automotive electronics companies. Global automotive infotainment operating systems growth are expected to double in four years, and DAIO can benefit from the trend.

SentriX Security Programming Technology

The IoT (another super theme) is forecast to be bigger than the mobile internet and desktop markets but security issues must be addressed. That is why DAIO is developing the SentriX Security Programming Technology. Designed to secure supply chains, and maintain firmware integrity over the product lifecycle, SentriX technology securely programs authentication ICs, Secure Elements, and Secure microcontrollers for the automotive electronics and Internet of Things (IoT) markets. It was unveiled at the Embedded World Conference and Exhibition last month in Nuremberg, Germany where DAIO announced partnerships with Renesas, Infineon, EBV and SecureThingz. DAIO continues to invest in SentriX for growth beyond 2017 to support a 4 billion unit secure element/secure microcontroller market. 

High Operating Leverage

DAIO has a very high gross margin of 57.7% in 1Q2017. Due to additional R&D to support the SentriX platform, its spending was up $420,000 year on year. As a result, DAIO has a very high operating leverage. With increases in revenue when it is above the operating expenses level, income will grow exponentially. And eventually, when the level of R&D normalise, DAIO is expected to see cost savings and larger net income.

Matrices
- Relatively high P/E - With a trailing twelve month EPS of $0.36, at the current price of $5.98, it is trading at a P/E of 16.6 times, not particularly cheap. Factoring that Q1 is traditionally the worst quarter, the forward P/E should be lower. As a high-growth company, DAIO is likely to be still undervalued at current price.
o Low float with low volume - DAIO has a low float of  4.9 million shares, which is positive. However, with a low average volume of 51 thousand shares, the float is about 100 times its daily trading volume.


Risk Factors/ Things I do not like

  • Not a revenue generation year for SentriX: As much as IoT security may be the next big thing, DAIO has confirmed that the focus in 2017 is on developing the technology and the relationships. I am unlikely to hold the stocks till 2018 based on my strategy so is unlikely to reap the benefit of a successful SentriX.
  • No history of 2 week spike: Looking at the chart, DAIO has been spiking on result release for the past 4 release. However, after the 1 week spike, it will be a sideway movement till the next release. If the trend continues, it is difficult for me to profit from the stock in the short term and may even have to exit the trade with a loss if the price falls below the magic line during a consolidation.


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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.