Why I am Bullish on Technology.
When I sat down to write this issue, I couldn't shake off visions of our high-tech future. Whether we're headed for peace or chaos, one thing seems certain: technology is going to play a massive role. That's why I'm super bullish on tech. No matter what the world looks like tomorrow, cutting-edge technology will be at its heart. I've been putting together what I call my 10x portfolio, picking out potential giants like the next Nvidia or Apple.
To spot these next tech giants, I often find myself imagining the world a few years down the line—the devices we'll use, the technology we'll interact with daily, and so on. This vision shapes how I pick the stars for my 10x portfolio. In the last issue, I focused on Luminar Technologies for its leadership in LiDAR technology, a technology poised to become a standard feature in vehicles, with the first equipped models already rolling off the assembly lines.
This edition zeroes in on a "picks and shovels" business that’s supplying critical components across several high-tech sectors. It's a backbone player in the high-tech future we're speeding towards, and chances are, you've probably never heard of it.
These kinds of companies are typically found in the small and micro-cap universe, which, while risky due to their size and the unpredictable nature of success, also offer the thrill of potentially big wins. To balance this risk, I use "rightsizing", meaning I limit these high-risk, high-reward investments to an initial $500 per position. This allows me to pursue significant upsides without overexposing myself.
I invest small amounts in these high-risk, high-reward companies, knowing that some will fail, some won't grow as expected, but a few will deliver the big returns I'm aiming for. If you choose to invest in these high-risk stocks, do so with caution and practice rightsizing to safeguard your portfolio. Now, let’s dive into the heart of this issue.
Tiny Components for Major Next-Gen Tech.
I’ve always had a thing for technology. It started back in the mid-1990s when I got my first PC—it was love at first ‘boot up’. Watching the tech world explode from those early days to now has been nothing short of a thrill ride. It’s companies like the one I’m about to dive into that keep the excitement alive, knowing they're part of nearly every piece of cutting-edge tech we use today.
In this edition of Something to Consider, I’m thrilled to introduce you to a recent addition to my 10x portfolio. It's a company not many might know by name, yet it plays a critical role in the tech world with annual revenues nearing $30M USD. This firm is a true workhorse, diligently crafting minuscule components behind the scenes, essential for powering a variety of high-tech applications.
Where might you find their products? Well, they're everywhere—inside AR/VR headsets enhancing our reality, in the night-vision goggles that pierce the dark, in satellites orbiting overhead, in the fingerprint scanners that secure our devices, in advanced medical imaging technologies that save lives, in the technology that makes streaming and cloud computing possible in data centers, and crucially, in the LiDAR systems that are bringing the future of autonomous vehicles to our streets today. This company is not just participating in the tech landscape; it's enabling it.
Syntec Optics
Syntec Optics (OPTX:NASDAQ) was formed in the 1980s through the merger of three advanced manufacturing companies—Wordingham Machine, Rochester Tool and Mold, and Syntec Technologies. Based in Rochester, New York, Syntec has evolved into a fully integrated optics manufacturer, producing a wide range of products for the optics and photonics industry. Photonics is the science behind the detection, generation, and manipulation of light or “photons”.
In today's world, photonics plays a crucial role in the technologies we rely on. Optics and photonics help reduce cost, size, weight, and power consumption, making devices faster, more powerful, and less expensive. These advancements are essential for bringing new technology to the masses.
Companies like Syntec Optics are poised to gain tremendously from the rising demand in various industries, such as electric vehicles, electronics, robotics, automation, and satellites. The rapid growth of technologies like Generative AI, cloud computing, autonomous driving, Internet of Things (IoT), augmented reality, virtual reality (AR/VR), are major factors fueling this demand.
Syntec Optics is a small, vertically integrated manufacturer specializing in optics and photonics components, which are sold to original equipment manufacturers (OEMs). They produce a wide range of components for various applications, including consumer electronics, defense, healthcare, and more recently, communications. Syntec's comprehensive capabilities make them a key player in these diverse industries.
In the defense sector, Syntec supplies parts for night vision goggles and missile systems, including laser guides for missiles. Syntec provides essential components for communication, such as parts for low earth orbit satellite transmitters, receivers, and high-precision mirrors used in high-speed data transmission.
They also specialize in optical interconnects, systems that use light to transfer data efficiently. Data is expanding at an incredible rate, driven by smartphone usage, streaming services, and the growing influence of AI.
This is where Syntec's innovations come into play, particularly their development of interconnects for telecommunications clients. Syntec manufactures photonic integrated circuits (PICs), essentially microchips that facilitate rapid data movement. Using photonics, these circuits enable data to travel at the speed of light, ensuring fast and efficient data transfer.
Growth Opportunity
The growth potential for Syntec Optics is immense. The photonics industry, in which Syntec operates, generates about $300 billion in revenue each year. With around 4,800 companies in this space, approximately 71% are small businesses like Syntec. This fragmentation presents significant opportunities for consolidation, which I believe will be a key trend in the foreseeable future.
Syntec's growth will come from two ways: first, organic expansion. They've already made impressive strides in this area. In 2023, they broke into the communications market with their space optics for Low Earth Orbit Satellites, raking in $5.3 million in revenue. This achievement showcases their ability to innovate and penetrate new high-growth markets, paving the way for continued expansion in the tech landscape.
Another key growth strategy for Syntec is through consolidation. The photonics industry is highly fragmented, with around 4,800 companies, many of which are small players. This means there are plenty of opportunities for mergers and acquisitions. Syntec could potentially acquire these smaller companies to enhance its capabilities and market share. Alternatively, Syntec itself could become an attractive acquisition target for larger companies looking to boost their technological edge.
Syntec Optics is one of those "picks and shovels" businesses that supply essential tools and technologies across various high-tech industries. Investing in Syntec is like gaining a backdoor entry to the world of cutting-edge technology, allowing us to benefit from multiple tech trends without betting on a single end-product or service. This diversification within the tech sector makes Syntec a compelling addition to my 10x portfolio.
By the Numbers: Syntec Optics' Growth Potential
In 2023, the company generated $29 million in sales, up from $27.8 million in 2022. Net income for 2023 was $1.97 million, or $0.06 per share, compared to a loss of $0.01 per share in 2022. Free cash flow for the year was $871,000, an increase from $687,000 in 2022. By the end of fiscal 2023, the company had $2.1 million in cash and $8.9 million in short and long-term debt, down from $9.9 million in 2022.
Despite its small size, Syntec Optics has significant room to grow its revenues in the near future. Various tailwinds could help this company grow organically. In the last quarter of 2023 and the first quarter of 2024, Syntec launched new products and received orders in the communications, defense, and biomedical markets. This includes their expansion into the communications market with the launch of space optics for satellites.
Syntec Optics may be a small player now, but its strategic moves and expansion into high-growth markets position it for significant future growth. This is a company with the potential to become a major player in the high-tech industry, riding the wave of increasing demand for advanced photonics solutions.
2024 Financials
For the first quarter of 2024, which ended on March 31, the company reported revenues of $6.2 million, down from $6.8 million in the same period in 2023. This decrease was mainly due to a delay in receiving nearly $2.3 million in orders across the biomedical, consumer, and defense markets. However, this was partially offset by a $1.7 million increase in the communications market compared to the previous year.
During the quarter, the company posted a net loss of $1.2 million, compared to a net income of $53,000 in Q1 2023. They ended the quarter with $1.7 million in cash and $8.8 million in total debt. The company experienced cash outflows of $385,000 for the quarter, compared to free cash flow of $300,000 in the corresponding quarter of 2023.
The company hasn't provided guidance regarding expected revenues for the entire year. I would love to see at least a 20% increase in FY 2024 compared to 2023. With the rise of artificial intelligence and the growing need for more data centers, along with the new markets the company has entered, I believe 2024 should bring continued revenue growth.
The recent developments in 2024 provide a clearer picture of what to expect in the future, which is what really matters.
With the assistance of AI, I believe we are on the verge of major technological breakthroughs in the near future. Optics and photonics will play a crucial role in this advanced technological landscape. Syntec Optics is well-positioned to benefit significantly from these advancements, and that's why I'm adding it to my 10x picks.
When it comes to investing in Syntec, you have two options: you can buy the shares (OPTX), currently priced at $2.45, or you can opt for the company's warrants (OPTXW), trading at $0.06 at the time of writing. There are 36 million shares outstanding and 14.1 million warrants available. I've chosen to start by purchasing the warrants, which expire in November 2028. These warrants give me a long-term call option on the company. They have a strike price of $11.50, meaning if the stock price exceeds $11.50 by 2028, I can convert my warrants to shares at that price. This strategy allows me to acquire more units than if I were buying shares directly. If the stock price rises significantly, the value of the warrants should increase accordingly. Plus, I have the flexibility to sell some of the warrants while holding onto the rest.
Final Thoughts
As I wrap up this issue, I want to highlight some troubling signs in the financial system. It doesn’t seem like the economy is doing well. Take Toronto, for instance: condominium sales are struggling, and several projects are facing financial difficulties and entering receivership. A receivership is when a court appoints a receiver to manage the property and business of a financially troubled company to pay off debts.
These signs point to bigger problems: real estate values are dropping in Toronto and Vancouver, unemployment is rising in Canada, and many local restaurants and retailers are shutting down. Recently, VanCity, one of Canada’s largest credit union, announced it would lay off 200 employees, and Global TV is letting go of 35 employees. I might sound pessimistic, but I think these are signs of deeper economic troubles ahead.
In the United States, credit card debt and buy-now-pay-later obligations have hit record highs, and more people are falling behind on their auto loans. Even fast food restaurants are noticing their customers cutting back on spending. To win back these budget-conscious diners, many large fast food chains are launching value meal promotions. Even Starbucks said it would offer a $6 breakfast sandwich and coffee combo. These deals are designed to attract customers who have reduced their fast food consumption due to rising prices.
Commercial real estate is still struggling. This spring, the AT&T Tower, one of the tallest towers in St. Louis, which sold for $205 million in 2006, was sold again for about $3.6 million, marking a stunning 98% decline in value. While most concerns about US commercial property have focused on the office market, it turns out that multifamily buildings are also in trouble. According to MSCI in a recent Bloomberg article, over $56 billion worth of real estate is at risk. This year, Starwood Real Estate Income Trust (SREIT) is seeing investors rush to pull out their money. To maintain liquidity and avoid selling off assets, SREIT has tightened the rules on shareholder withdrawals. This highlights a broader issue in the real estate sector and suggests more financial instability could be ahead.
Given these signs, I'm sticking to my strategy of keeping at least 90% of my portfolio in cash until the next significant downturn in the markets. I'm only putting small amounts into speculative 10x opportunities. I want to have a pile of cash ready for the right opportunity when fear returns to the markets and people start panic selling. If I have to wait another year, that's fine. At least GICs are offering a somewhat decent return, with rates at 4.30% for Canadian savings and 4.90% for USD savings.
Below, you'll find a detailed table outlining the portfolio's composition as of June 21st 2024. Cash and GICs continue to make up the bulk of the portfolio, offering a solid foundation and ensuring that the portfolio remains robust amidst uncertainty.
Portfolio Composition
| As of June 21st 2024 | |
|---|---|
| Category | Portfolio Weight |
| Cash and GICs | 93.33% |
| 10X Picks | 1.83% |
| Defensive Picks | 4.03% |
| Crypto | 0.81% |
| TOTAL | 100% |
Remember that the content of this newsletter is neither a stock recommendation nor investment advice. This is just something to consider. You can access my watchlist and portfolio through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.