Large-scale display systems expert Daktronics (DAKT 0.10%) has been on a roller coaster in recent years. After alternating rounds of crisis-inspired layoffs and Wall Street-stumping success, Daktronics' stock more than tripled in 2023.
Does this volatile microcap have room to run higher, or has the stock already reached its peak value?
The story so far
Daktronics took a hard hit from the coronavirus pandemic. First, investing in displays for sports arenas made little sense when the stadiums weren't hosting any games. Then, the slow return to normalcy in sports attendance and other live events dovetailed with an inflationary emergency, putting more roadblocks in front of arena upgrades.
However, the economy's events had some surprising effects on Daktronics' business results. The company burned a lot of cash in fiscal year 2023, which ended on April 30, 2023, but revenue actually rose by 23% that year.
The good news continued in the ongoing fiscal year. Daktronics posted strong earnings surprises in the first and second quarters, more than doubling Wall Street's consensus bottom-line targets in both cases.
Stepwise price adjustments have proven effective, raising the company's revenue without scaring away prospective clients. At the same time, Daktronics is working through its robust backlog by focusing on shorter lead times from order placement to completed installation.
NASDAQ: DAKT
Key Data Points
Where can Daktronics go from here?
The stock has gained 206% in 52 weeks, but that doesn't necessarily make it an expensive investment. Daktronics shares currently trade at just 8.6 times trailing earnings and 6.3 times free cash flow.
That's bargain-bin pricing, typically reserved for companies on the brink of bankruptcy or stuck in an industry with minimal growth prospects. It's true that Daktronics came close to financial collapse in 2022, but a sharp cost-reduction program and the operating improvements mentioned above led to robust profits in recent quarters.
At this point, Daktronics' future prospects depend on whether it can continue its turnaround story or not. And on that note, I see some promising signs.
- Operating costs are going up again but at a controlled pace. They accounted for 15% of total revenue in the first quarter, down from 17% in the year-ago period.
- The $307 million backlog of unfilled orders may be a sign of production and installation issues in years past, but it's also a solid source of guaranteed future revenue. Thanks to the newfound operating efficiency, that backlog is down from $463 million in the second quarter of fiscal year 2023.
- As a result, Daktronics' revenue is soaring -- and management can control the trajectory of this chart to some degree by selecting which backlogged orders to complete first:
DAKT Revenue (TTM) data by YCharts.
My final verdict: Daktronics is an encouraging but risky turnaround play
In summation, the numbers paint a promising picture for Daktronics. The company's strategic cost reductions, combined with a significant decrease in the order backlog, point toward efficient operations and a healthier balance sheet. The company's current valuation suggests an attractive investment opportunity, given the improvements to its operating efficiency.
However, it's not a slam-dunk buy for every type of investor. You have to accept the risks that come with turnaround bets -- some stories don't have a happy ending, after all. And Daktronics has been on the brink of disaster before under a substantially unchanged management team.
Daktronics shares may indeed continue to rise in 2024 and beyond, but only if the company can maintain its fiscal discipline while chipping away at the meaty order backlog. That's not as easy as it sounds, and the stock market is littered with failed turnaround plays. Hence, this stock seems more suitable for investors with a higher risk tolerance and a long-term investment horizon, as opposed to those seeking stable gains in a shorter period.
