Stock Sonar #55 – 5/8/2024 - 5/8/2024

Innodata (NAS:INOD)  — mrkt cap $266mm; Price $9.30; EV/EBITDA 43

PASS. Although INOD’s stock price surged nearly 40% earlier today due to a positive surprise in top-line results, we believe that INOD is not the AI play that many investors think it is. INOD was founded in 1988 as a publishing and media entertainment company. It has evolved over the years to assist companies with digital transformation and now helps companies with LLM generation through curating data sets. This is likely a very manual intensive process that gets outsourced to INOD and likely will become obsolete soon as this process becomes automated. We believe INOD’s future performance will resemble that of Appen, another AI data company.

United Natural Foods (NYSE:UNFI)  — mrkt cap $576mm; Price $9.7; EV/EBITDA 7.5

PASS. United Natural Foods is one of the largest distributors of natural, organic, and specialty foods to supermarkets and grocery stores. If the market structure is ideal, good distributors can be an example of a great business that has very low margins—usually two traits that don’t often gallop together. UNFI was chugging along just nicely until its self-inflicted and value-destructive acquisition of SuperValu in 2018 for ~3 billion. The goal was to broaden their offering and expand their range of conventional supermarket and grocery chains (pre-acquisition, roughly 1/3 of revenue was from Whole Foods). Integration has not proceeded efficiently, and gross margins have declined despite improving revenue growth—even after the acquisition, UNFI’s customers appear to have too much bargaining power. This is compounded by UNFI being inefficient with its assets. We will keep an eye on this one and look to pivot if they are making strides on the efficiency front.

CompoSecure, Inc. (NAS:CMPO) — mrkt cap $625mm; Price $7.75; EV/EBITDA 7.8

PASS. CompoSecure specializes in producing high-end metallic payment cards (think like an aluminum AMEX card). Traditionally partnering with major banks like Chase and American Express, CompoSecure’s revenue growth has stalled in 2023, with only a slight projected increase from 2022 and a significant drop in gross margin. Despite a sound balance sheet and optically low valuation, the company faces structural headwinds from the rise of digital and contactless payments, which threaten the demand for physical cards. The company is trying to diversify into cryptocurrency cold storage solutions, but efforts in this arena have yet to come to fruition. We generally stay away from businesses that are shrinking regardless of how low the valuation is.

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