Adesto Stock: IoT Play Entails High Risk But the Potential Reward Is Worth It

Strong Tailwinds in IoT Are Bullish for IOTS Stock
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Beaten-Down Adesto Stock Still Has Life

A look at the small-cap technology space shows the carnage that left many higher-beta stocks struggling to stay afloat in what is a negative environment.

But in my view, the degree and rate of the selling has been overdone and is unwarranted.

An aggressive play on the Internet of Things (IoT) space is Adesto Technologies Corp (NASDAQ:IOTS). The stock is badly beaten up, but it offers traders a good risk-to-reward situation.

The story behind IOTS stock is intriguing. The micro-cap company develops proprietary memory chips for a broad range of IoT applications, including industrial, consumer, medical, and communications.

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What makes Adesto’s chips ideal for IoT is their low power consumption, which is critical in small devices that are limited by space but demand adequate power.

The below Adesto stock chart shows a positive trend followed by a downside break after the stock undertook a secondary offering at only $6.00 in July.

Chart courtesy of StockCharts.com

IOTS stock is down 21% this year and 35% over the past year.

It has, however rallied by more than 50% off its 52-week low of $3.51 in October and is looking to retest the $6.00 level prior to taking a potential run toward $9.00.

Strong Tailwinds in IoT Are Bullish for IOTS Stock

The revenue picture for Adesto shows three straight years of growth, including a strong 27.6% surge to a record $56.1 million in 2017.

Fiscal Year Revenue (Millions) Growth
2013 $49.7
2014 $41.5 -16.5%
2015 $43.3 4.3%
2016 $44.0 1.6%
2017 $56.1 27.6%

(Source: “Adesto Technologies Corp.MarketWatch, last accessed November 30, 2018.)

Adesto is estimated to ramp up its revenue by 49.4% to $83.8 million in 2018 and follow that up with another impressive 43.5% increase to $120.4 million in 2019. (Source: “Adesto Technologies Corporation (IOTS),” Yahoo! Finance, last accessed November 30, 2018.)

But while revenues are increasing, Adesto needs to move toward profitability after five straight years of losses. One positive sign is that the loss narrowed in 2016 and 2017.

Fiscal Year Generally Accepted Accounting Principles Diluted Earnings Per Share Growth
2013 -$0.49
2014 -$0.53 -9.6%
2015 -$2.79 -422%
2016 -$0.77 72.4%
2017 -$0.31 59.7%

(Source: MarketWatch, op cit.)

Adesto is estimated to narrow its adjusted loss to $0.18 per diluted share this year, compared to $0.05 per diluted share in 2017. There is some optimism because Adesto is estimated to earn $0.08 (and as high as $0.17) per diluted share in 2019. (Source: Yahoo! Finance, op cit.)

On a free cash flow (FCF) basis, Adesto is yet to turn positive, but there was a 59.4% improvement in 2017.

Fiscal Year Free Cash Flow (Millions) Growth
2013 -$2.9
2014 -$1.3 54.2%
2015 -$7.7 -473.6%
2016 -$7.5 2.2%
2017 -$3.1 59.4%

(Source: MarketWatch, op cit.)

Analyst Take

There is no doubt that the IoT space is only going to expand. Companies like Adesto with innovative technologies could find themselves in a sweet spot.

The fact that revenue is set to surge is bullish for Adesto stock. A move toward profitability will help rally IOTS stock back toward its previous high.