How a beaten up tech stock could be the ASX's best AI play

The age of Artificial Intelligence (AI) has undoubtedly arrived. Despite its existence deep-rooted in technology, AI’s applications are not confined to the technology sector – think manufacturing, resources, finance, marketing. One fundie thinks he has found the best AI play on the ASX.

Speaking on Reach Markets’ The Insider: Meet the Fund Manager in March 2023, David McNamee, who manages the portfolio of Altor Capital’s wholesale Alpha fund, selected the founder-led Ai-Media Technologies Ltd (ASX: AIM) as one of his favourite stocks. Watch the full The Insider: Meet the Fund Manager session.

Ai-Media was founded in 2003 and is currently led by co-founder and CEO Tony Abrahams, who was recognised by the World Economic Forum as a Young Global Leader in 2013 and attended the University of Oxford as a Rhodes Scholar.

The company is considered Australia’s biggest captioning services provider and has a broad international presence. With an AI-powered platform enabling speech to text conversion in real time, AI-Media has attracted a swarm of high-profile clients, a majority of whom operate in the media and broadcasting sector – including Seven Network, Nine Network, Foxtel and Sky News.

“We were looking for key criteria of beaten up tech companies over the last 12 months given the recent significant selloff in the market,” Mr McNamee said. He summarised the criteria, namely good businesses with strong moats and balance sheets, and the comfort of knowing they can survive a period or scarce risk capital.

“That’s the case with this company. They’ve got $10-15 [million] dollars of net cash on the balance sheet effectively moving into cash flow or EBITDA profitability,” he said. In H1 FY23, Ai-Media earned $1.4 million EBITDA (compared to breakeven EBITDA in H1 FY22) which was driven by a 60% increase in gross margin (up from 53% in H1 FY22 and 38% in H1 FY21.

Mr McNamee attributed this positive showing to the very factor he thinks also caused Ai-Media to lose favour with the market, earlier highlighting how the company’s share price fell from a listing price of $1.23 in October 2020 to ~30 cents at the time of speaking.

“What the market hasn’t liked traditionally about this business and why it’s been sold off is that it’s been cannibalising its customer base,” he said, but stated that the cannibalisation also brought in technologies that could effectively and quickly scale across a number of customers, resulting in the higher gross profit margins the company had achieved.

“We think they’re at the backend of that cannibalisation…the opportunity set ahead for this company is just enormous,” Mr McNamee said. “With tier 1 customers, trading on 1x revenue with a strong balance sheet…It’s got a very stable base to actually build off very quickly now to any new customers…We think the best way to play to the AI trade on the ASX.”

Mr McNamee also highlighted Ai-Media’s key acquisition of North American video and captioning technology company EEG in April 2021. In September 2022, Ai-Media signed a five-year contract renewal with Seven Network, adding to its long running stint with the blue chip broadcaster which started in 2016.

Click here to view more videos from David McNamee’s The Insider: Meet the Fund Manager session.

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