Today we’re going to look at two small-cap ASX shares that our analysts thought offered five-star value at recent price levels.

Before we start, remember that you should have a solid investing strategy in place before weighing up any individual shares. Go here for a five-step guide to defining yours.

Also keep in mind that investing in small-cap shares like the ones mentioned in this article can be very different to investing in larger, more established companies.

For a discussion of the merits and potential drawbacks of investing in smaller companies, see this article by Simonelle Mody. Now, onto the picks.

Audinate (AD8)

Audinate shares have not had a good year: they are down the best part of 70% since April 2024 and were recently deleted from the ASX200 index. Our analyst Roy Van Keulen, however, continues to see far more value in the company than markets are ascribing to it.

Audinate’s Dante is the industry-standard protocol for digital audio networking. It is installed in over 4,000 different audio-visual devices such as microphones, mixers and speakers. This is over twelve times as many as the next competitor, a margin that has grown significantly over the years.

Audio-visual professionals are still at a very early stage of moving from analog networking to digital. For context, Roy estimates that digitally enabled audio devices made up just 10% of total audio device sales in 2023, for example, up from around 5% in 2016.

He sees clear tailwinds for audio’s digitalisation to continue as connecting devices using ethernet cables and a network brings cost-savings and less loss in quality over longer distances compared to using physical cables.

As for Audinate and Dante’s position in digital networking, Roy thinks that network effects mean it is a market that Audinate is likely to win.

Audio-visual products using the same protocol work well together, while products using different protocols experience more friction. It is possible for manufacturers to install two digital protocols on the same device, but this is rare because it entails extra manufacturing costs.

Roy sees AV professionals preferring products that use the same protocol. Meanwhile, he expects that equipment manufacturers will prefer building products most in demand by AV professionals, therefore pulling them towards the Dante protocol too.

Turning to Audinate’s sales, Roy thinks the company can grow revenue at an average of 15% per year for the next decade, driven by the audio industry’s continued digitalisation and Audinate holding onto its dominant market share in this niche.

A key part of Van Keulen’s Fair Value estimate rests on the direction of Audinate’s profit margins. He expects these to expand considerably due to 1) higher-margin software and royalty revenue becoming a bigger portion of sales and 2) Audinate starting to flex its network effect and charge higher prices.

Roy raised his long-term Fair Value estimate for Audinate to $19 per share following its recent first-half results. This suggests a lot of potential upside from current price levels of below $7. However, it is worth nothing that Roy has attached an Uncertainty Rating of Very High to his valuation.

Audinate’s revenue and profits have been volatile—most recently because of a severe build-up of inventory by audio equipment manufacturers. In addition to this, Roy notes that while Audinate has a strong position in digital audio-networking, it is hard to know exactly how big this market will be.

Audinate

  • Moat rating: None
  • Fair Value estimate: $19 per share
  • Uncertainty rating: Very High
  • Star rating: Five stars

Kogan.com (KGN)

Kogan.com is an online retailer that offers private label products across multiple categories including consumer electronics, furniture, and fitness. It also offers branded products from third-party sellers and white-labeled products and services including mobile plans, insurance, and travel packages.

Our Kogan analyst Johannes Faul says the firm’s strategy is broadly based on low-price leadership. Amid greater competition from Amazon and omnichannel retailers, Kogan has also launched a new online marketplace and built out its product offerings in bulkier goods.

Kogan has also had success in rolling out Kogan First, a loyalty subscription service that allows users to pay less for products and delivery and get access to exclusive offers. Johannes estimates that Kogan First has around 500,000 members, which isn’t bad when you consider that it only launched in 2019.

Kogan saw its sales skyrocket during the pandemic as a lot of growth in the e-commerce industry was pulled forward. As its growth numbers normalised, Kogan faced a stern stock market reckoning—its shares touched a high of almost $25 in late 2020 before shedding over 80% of their value since.

Looking forward, though, Johannes thinks that Kogan stands to benefit from commerce’s continuing shift online. And while Kogan can expect fierce competition from Amazon and other players, he thinks that Kogan can hold on to more market share than investors give it credit for.

Overall, Johannes thinks that Kogan can grow revenues in its core Australian e-commerce business at an average of 7% per year in addition to significant growth in sales from Kogan First. At $10.70 per share, his Fair Value estimate for the company is considerably higher than the current share price of under $5.

Kogan.com

  • Moat rating: None
  • Fair Value estimate: $10.70 per share
  • Uncertainty rating: Very High
  • Star rating: Five stars

Don’t forget

Individual shares should only be considered as part of a well-defined investing strategy. Before weighing up individual investments, consider following this guide to arriving at a strategy suited to your goals.

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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 more about how to identify companies with an economic 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.