Audio networking company Audinate (ASX: AD8) updated markets this week and the reaction wasn’t pretty.

The company, which we recently highlighted as a high quality small-cap stock, saw its shares plunge 50% before recovering to finish around 30% behind. 

Morningstar’s Audinate analyst Roy Van Keulen has decreased his Fair Value estimate for the shares but maintained that they offer value for long-term investors.

Before we dig into the results and the longer term outlook for Audinate, a quick reminder that you shouldn't consider individual shares or funds without having a solid investing strategy in place first. Here is Mark LaMonica's step by step guide to crafting one. 

How does Audinate make money?

Audinate’s Dante protocol has become the world’s most widely used protocol for digital audio networking. Over 400 equipment manufacturers including Bosch, Bose, and Yamaha license the Dante protocol to enable digital delivery and management of audio for audio-visual (AV) products, such as microphones, mixers, and speakers.

Dante is enabled in over 10 times as many products as its nearest competitor, Ravenna. AV products using the same protocol work well together, while products on different protocols experience more friction. While two protocols could theoretically be installed on the same device, the extra cost of doing so for manufacturers makes it less likely.

Taken together, Van Keulen thinks that Audinate’s business can benefit from network effects as the market for digitally networked audio devices grows. This underpins his view that Audinate has a Narrow economic moat, something we define as a structural advantage that can deliver outsized returns on capital for at least 10 years.

Why did Audinate shares fall?

Audinate’s revenue and profit for fiscal 2024 were largely as expected. But investors were caught off guard by a forecast revenue decline in 2025. This was considerably lower than the 20% or higher growth that was expected by most analysts covering the company.

The coming revenue slowdown stems mostly from two factors – one of which was always likely and one of which could be seen as a long-term positive.

The first headwind was that 2024’s sales were boosted by a bigger than usual backlog of orders being cleared. This meant that 2025’s sales were always going up against a tough comparable. This was expected, but the magnitude of this appears to have been underestimated.

The second factor is Audinate’s continued shift in revenue mix from hardware products – mostly chips, cards and modules that are placed inside AV devices – to lower ticket but higher margin software revenue. This shift weights on sales but helps Audinate keep a higher percentage of sales as profit.

The long-term view

Van Keulen expects that Audinate’s strategy will continue to focus on accelerating the secular transition toward digital audio networking. This market is still at an early stage – Van Keulen estimates that digitally enabled audio devices were around 10% of new device sales in 2023, up from 5% in 2016.

Analog networking continues to be the dominant technology, with switching costs from existing installations and digital networking being cost prohibitive for lower-value devices and use cases. However, a continued transition to digital networking looks likely.

Digital networking requires far less cabling than analogue setups do, a big cost saving. It also doesn’t experience losses in audio quality over longer distances in the same way that analogue setups can.

Audinate is also trying to gain a foothold in the video networking market, however, the market is at a far earlier stage due to its greater technical difficulty – and Audinate does not currently enjoy anything like the dominance it has in digital audio. Van Keulen does note, though, that its existing relationships with equipment manufacturers and audio professionals could put them at an advantage.

How much could Audinate be worth?

Van Keulen revised his Fair Value estimate for Audinate down to $18.50 per share.

This valuation reflects an assumption that Audinate can grow its revenue at an average of 17% for the next decade. The main driver here would be further growth in digital audio networking, a market that Van Keulen thinks Audinate is set to dominate.

If network effects make Dante a “must have” in digital AV devices, this could give Audinate pricing power and lead to higher profit margins. The continuing shift in revenue mix from hardware to software products is likely to boost these further.

At current share price levels, Audinate shares command a five-star Morningstar rating. This means our analyst thinks they trade at an attractive discount to Fair Value. While 2025 looks likely to be a year of transition for Audinate, Van Keulen thinks it could precede a resumption in growth.

Van Keulen attaches an Uncertainty rating of High to his valuation. It remains impossible to know how big the audio networking market will prove to be. He also sees technological disruption and cyclical demand for audio devices as other potential risks.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.