When talking about success stories from the tech sphere, one more likely than not primarily thinks of US companies. While there are a handful of well established big players outside of the US and in addition quite a few ascending, though more locally focussed businesses from Asia and Latin Amerika, too, I must honestly go deep into myself to name two or three European tech success stories of worldwide relevance with a big name, strong growth profile and dominant market position. Among smaller companies, there is a promising candidate to have an eye on – from an unexpected sector.

Summary and key takeaways from today’s Weekly
– VusionGroup is an aspiring and interesting tech business from Europe which is digitizing the physical retail sector.
– Until 2020 not much happened, but since then the business caught fire, with further prospects being strong.
– However, I have a bug problem with the valuation.

Often it is the case that when talking about “success stories” or “big names”, one likewise tends to automatically think of big companies, primarily measured by market capitalizations. This is best proven when thinking about US tech success stories.

I think, I don’t need to name the obvious here.

While this is not wrong per se as such companies would not have grown into what they are weren’t they equipped with a strong growth profile and dominance in their respective areas of activity, many dominant players in smaller sectors or industries simply get bypassed, not to mention the potential success stories of tomorrow.

The first big names that come to my mind outside the US and Europe are Samsung Electronics (ISIN: US7960508882, Ticker: A005930), Taiwan Semiconductor (ISIN: US8740391003, Ticker: TSM), Sony (ISIN: JP3435000009, Ticker: 6758), MercadoLibre (ISIN: US58733R1023, Ticker: MELI) as well as the usual suspects from China.

However, the latter two are locally limited and not active worldwide.

Of course there are some names from Europe, too, like ASML (ISIN: NL0010273215, Ticker: ASML), SAP (ISIN: DE0007164600, Ticker: SAP) or Adyen (ISIN: NL0012969182, Ticker: ADYEN).

Have you ever heard anyone saying “SAP, the European tech success story”?

In the case of SAP, it is also very hard to talk about a growth story now as is. With the exception of ASML, there is no such a thing like a “European amazon (ISIN: US0231351067, Ticker: AMZN) or Apple (ISIN: US0378331005, Ticker: AAPL)”.

A “real” tech champion of worldwide significance, with a strong market-leading position and plenty of growth yet to come somehow is missing.

I have come across the Paris-listed VusionGroup (ISIN: FR0010282822, Ticker: VU) of which I’ve never heard of before – and I am sure most people don’t know this name, either. This is not a shame, as the company changed its name just at the beginning of 2024. And it’s not selling end consumer products, but it’s active in the B2B business.

What is known, though, are some of their products which can be seen every day.

As the underlying trend is in the early innings, we are dealing with a candidate from the category “potential tech success story of tomorrow”. Today’s Weekly is about a high-growth company, specialized in the digitalization of physical retail, especially super markets. A very interesting combo.

My members and I are on the hunt for stock ideas to beat the S&P500 and the Dow Jones. With my risks-first approach (paired with high upside), I am able to find stocks with strong fundamentals and catalysts on the horizon for great returns over the long-term.

Front and center is risk management. While my picks are currently lagging the benchmarks a bit, we’re not running into one of the most overlooked risks: valuation risks.

I should also mention concentration risk, but valuation and potential multiple contractions are what the majority of investors currently riding the wave of tech success does not have on their radar.

In times like these, it makes more sense to look where others don’t: special situations, takeovers, spin-offs, company reorganizations and organic growth stories with low valuations.

Join me and my members on our journey to beat the markets!

^{both as per 25 September 2024 market close – since August 2022}

If you struggle to find high-quality stock ideas, let me inspire you. As a Premium or Premium PLUS Member, you receive my exclusive research reports with my best and market-beating stock ideas.

A recession-proof tech company from Europe?

VusionGroup, or in short just Vusion, has a very interesting profile.

The company’s roots trace back to 1992 when SES (Store Electronic Systems, not to be confused with the satellite operator from Luxembourg!) was founded by a French entrepreneur to bring technological innovations to a very manual sector. In 2014 SES merged with Austrian company Imagotag (forming SES-Imagotag until recently), a provider of high-frequency radio (HF) and e-paper screen technologies.

Later over the years, other transformative transactions followed like the acquisitions of Taiwanese e-Paper display company PDi, Germany’s Findbox (Internet of things and computer vision applied to the retail and logistics sector) and a British-Irish data analytics company.

The result is the “Global leader in digitalization solutions for commerce”.

Physical commerce, not e-commerce!

That’s the description you’ll find in their annual report (see here).

VusionGroup (since early-2024, prior: SES-Imagotag), has the mission to digitize the physical retail industry, mainly supermarkets and special retail like drug, convenience or DIY stores.

To make it more concrete, depending on where you live and which stores you visit for your frequent and recurring purchases, you might have noticed digital displays (“electronic shelf labels” or ESLs) showing the price of an item, just like on the picture below.

There’s a high chance such a display is from Vusion.

Vusion has more than 400,000,000 of such ESLs in place worldwide, spread over more than 60 countries and more than 40,000 stores. The Group counts among its clients over 350 food and specialty retailers across Europe, Asia, and North America, with the latter being the big growth driver.

These digital displays are the modern version of either printed or even handwritten price tags. One of the portrayed advantages is that prices can be adjusted centrally and electronically, instead of having staff running around to change small pieces of paper by hand – what an annoying task.

Not to hide this, there’s also the (negative) aspect that stores are making use of higher traffic could adjust prices “more efficiently for the best customer experience”.

Before we dive deeper into this topic, let’s have a look at the stock chart of VusionGroup which is listed in Paris.

Until about 2020, the stock rose only by in total ~50% since the chart begins in 2006.

Starting from there, we are seeing a give or take 8-bagger – even beyond the 2020–2021 small-cap tech frenzy – which seems a bit strange as we’re talking until here about the saturated retail sector and some electronic displays.

Today, Vusion has a market cap of 2.3 bn. EUR (and a bit lower EV).

Add to that the question, why is Vusion seemingly so strong and not overrun and undercut in price by cheaper Asian competitors who likely can mass-produce such displays for the proverbial pennies?

ESLs are only the beginning of a complex and highly-sophisticated product offering.

And ESLs are the only thing we as end consumers get in front of our noses.

The numbers and aspects mentioned until here prove that Vusion is not just a small start-up, living of hope, but a serious under-the-radar tech company. In fact, in order to operate such ESLs, a sophisticated IT infrastructure and data base is needed.

Otherwise, the company wouldn’t have such a selection of well-known customers.

It is not just someone typing in new prices into a computer from the back office.

In fact, the above until here is only one of six business units the company has. The other, for the average-shopper not visible segments handle huge data, process, backup, update and transmit them in a reliable and quick way in order to have things going smoothly without any interruptions or even failures. On top, there’s also inventory management available.

This is about the easiest way I could explain this multi-facetted business.

Vusion’s business factually is highly complex and herein likely the competitive advantage can be found.

Besides also safety of data and business secrets, the interplay of all necessary components leads to a hardware and software ecosystem that’s hard to replicate. Not to mention customer relationships and potential switching costs once the system is implemented.

The whole thing goes even beyond just displaying prices, but via the segment “Engage”, customers can place tailored ads just around products on the shelves.

While I must say that I am personally rather on the traditional side of things regarding this experience from a customer’s point of view, the business is pretty interesting nonetheless.

It seems Vusion has a strong moat due to creating spider webs in the retail sector.

As if this doesn’t sound great by itself, there’s a subscription and service component on top of one-time purchases which generates more stable and predictable cash flows.

This is why I used the headline-question of a recession-proof tech business, because once rolled out, it is unlikely that supermarkets or other physical retail stores will suddenly cut these service and software costs out of the equation in times of weaker sales.

What is almost certain, though, is that new business will turn sharply lower in times of economical hardship. But as with time the business should gear more towards a recurring business, the moat increases while economic sensitivity falls.

A pro pos sales, until recently, three quarters of sales were generated in Europe and the Middle East while the rest came from the “rest of the world” which includes Asia and North America.

However, Vusion has won Wal-Mart as their customer – the world’s single biggest retailer with total sales of 665 bn. USD as of late on a running twelve-month basis.

Little surprisingly, this has been a big push for the business, not just in terms of general sales growth, but also regarding geographical diversification. The US market is the one where the growth dynamic is the highest for the group.

While Vusion does not publish its order backlog by numbers – management was also reluctant to give the number during the last half-year results call – what is known is that for the year 2024, sales for the first time shall reach 1 bn. USD with orders available well into the next year. This guidance was confirmed a few weeks ago.

Looking at the development of sales and operating earnings, we can see both with a strong upwards momentum.

It gets even better, as management with the half-year results a few weeks ago raised their guidance, seeing better EBITDA-margins.

Free cash flow at first sight looks terrific, too.

But you need to be careful.

The FCF number includes a big customer-financed capital pre-payment (my guess is it’s Walmart), i.e. not what we traditionally understand as free cash flow. That’s also why the company suddenly has such a strong net cash position as per 30 June 2024.

The “true” or adjusted FCF as management has broken it down during the call was 24 mn. EUR or 6% of sales.

And here my euphoria for the business stops – valuation.

The stock has simply run too hot. As mentioned above, both, the market cap and the enterprise value, are 2.3 bn. EUR, respectively 2.1 bn. EUR. For a sales target of 1 bn. USD and an aspiring tech company, this sounds even reasonable if we consider on which multiples many US tech companies trade at.

Vusion, though, is until now a low-margin business. It certainly has improved and I can imagine margins going up over time as the service, software and maintenance parts increase their weighting of total sales.

But a current free cash flow of 40–50 mn. EUR for the full year (my estimate), indicates that we’re talking about an EV / FCF multiple of 40–50x. Even if the business doubled operationally (sales growth for this year is expected to be 25–30%), i.e. sales and especially free cash flow, there’d still be quite some growth priced in.

So, in essence, we have very high exceptions – something I do not like.

These expectations are priced into the stock. Any deviation to the downside in growth figures or even a small adjustment to the guidance and the stock is down 10–20% easily to let the hot air out.

I will for sure continue to monitor the company as it checks many boxes like a long growth pathway (retail is far from being digitalized), worldwide operations, a high management stake in the company, from how I understand it a strong business moat and the potential for higher-margin cash flows in the future.

But I am not willing to pay every price.

This one’s for the watchlist.

Conclusion

VusionGroup is an aspiring and interesting tech business from Europe which is digitizing the physical retail sector.

Until 2020 not much happened, but since then the business caught fire, with further prospects being strong.

However, I have a bug problem with the valuation.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

Likewise, you qualify for eight, respectively three more exclusive reports with my best investment ideas plus updates on the featured businesses over the next twelve months.

Premium PLUS Members also get access to all Premium publications.