Interesting European Small Cap Stock: Focusrite

What’s The Business?

Focusrite is a small UK listed company operating in the music industry, approximately 660M GBP in size. It produces a piece of hardware that’s called an audio interface, designed for people producing high end audio, such as musicians. Into this device, you plug in the computer, microphone, speakers and so on. It is highly important to have a good audio interface device for the best quality end recording. They have models for all stages of users, mostly for grass roots and novice musicians but also all the way up to professional musicians. It’s very hard to replace this product with software — if you want to produce music, you need it.

Why The Company Looks Interesting

  • Best quality product on the market — Focusrite is the best product on the audio interface market with strong brand loyalty. The Focusrite products cost anywhere between 100 and 3000 euros typically. When you have a market of very well off musicians that gets more and more competitive, you need the best quality equipment to give you the edge in your recordings. Musicians will not tolerate a second best piece of equipment, especially when the cost of the audio interface is low compared to their typical earnings. For this reason, you’d expect more musicians to buy Focusrite products rather than cheaper brands.
  • Recently there are many new end user categories — This product used to be used mainly by musicians. Now, over and above the growth in musicians, new users are starting to use the product, such as podcast hosts, Twitch streamers and social media influencers. These types of content have been gaining popularity rapidly. They have their roots in amateur made content, but as the areas start to mature, the producers are getting more and more professional so this will drive sales growth. No one will listen to an amature vlog on Youtube anymore, for example, if there are all the expertly made ones available, unlike when Youtube just started out.
  • They have loads of future upselling potential — They can potentially multiply their revenue without even growing volume or prices. This is because they mostly only sell the audio interface. A customer kitting out their audio recording studio will buy the interface as well as the microphone, headphones, electric guitar and so on that need to be plugged in. Typically, the interface is just 25% of what the customer will spend on building the set up. Therefore, the plan is to acquire businesses that produce all these other products so that Focusrite can gain a bigger share of what the customer is already spending. With a reputation like theirs, customers are likely to prefer buying all these products from them rather than a competitor. In effect, this means Focusrite can realize solid sales growth without increasing the number of customers in the total market and without increasing the amount of money they spend on audio equipment.
  • Latin American Growth — Huge growth market, a lot of music comes from there but it is not a well commercialized market. Focusrite even is the top regarded product here. Lots of growth is expected, Focusrite only recently have an office in this region.
  • Software is a huge growth opportunity — Currently, software is a couple percent of revenue but could be huge. Music needs to first be recorded and then edited. Focusrite’s main product, accounting for the majority of revenue, is the audio interface to record — this cannot be replaced by software. The one product that can somewhat be replaced by software is the editing hardware device they have, that accounts for about 15–20% of revenue. Focusrite themselves have recently produced this software, which works as a subscription model and you can also buy add-ons. All audio editing is done on the cloud — so suddenly Focusrite has taken away all barriers to entry on producing good audio. You no longer need a super strong computer since everything is stored in the cloud, and you no longer need to pay for the product up front as it has a SAAS model. Even though this new software might cannibalize some of the previous physical product that accounts for 15% of revenue, its opportunity is likely a lot greater. Suddenly, a whole new range of potential customers opens up, who don’t have the money to buy big expensive equipment from Focusrite. What’s more, you hook them when they’re small and can’t afford much, and then upsell Focusrite products to them in the future when they’re successful. This software is not just good for beginners, but even all the pros, and is super easy to use, unlike that of existing software. Software sales also allows Focusrite to collect customer details, which they didn’t do in the past, and upsell to them later on.
  • Run by former musicians — that are really close to the customer. The founder and chairman owns 30% of the company. This company has been running for decades.

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Disclaimer:
Any views or opinions presented in this article are personal and shouldn’t be taken/used as professional advice as we are not qualified financial advisors.
Any statistics mentioned have all been linked to their respective documents together with their ownership.
Lastly, we would like to note that this article has no tie to our professional jobs and was conducted in our free time.

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