The Catapult Group International Ltd (ASX: CAT) share price is trading at a lower range since the end of last year. I think this presents a compelling opportunity to buy an ASX growth share.
In this article, I want to unpack one key reason why I like Catapult, being its ability to harness the power of network effects. Before I dive into this, let’s remind ourselves what Catapult’s business entails.
What does Catapult do?
Catapult provides wearables and technology solutions to sports organisations and athletes. You know, the little black rectangular device that looks like a small box on the back of players on the field? That is what Catapult manufactures. The device is used to obtain data for sports management (coaches, fitness staff, etc.) to analyse, review, monitor and optimise performance.
Catapult generates revenue through the following channels:
- Manufacture tracking devices that are worn by athletes and provide analytical tools.
- Develop and provide tactical and coaching technology solutions through digital video and analytics.
- Develop and provide athlete management platforms to manage the health and performance of athletes.
- Content licensing through the provision of licensed video content.
Businesses that benefit from a network effect are those where the value of the product or service increases with the number of users.
Let’s step back and attempt to understand the power of the network effect in our everyday professional lives. Take LinkedIn for example. The value of your professional network increases as the number of people in your LinkedIn network grows because people gravitate towards those with a bigger network they can connect for mutual benefit.
A similar effect applies to businesses that benefit from the network effect, especially those with data. Google is a great example of how it managed to optimise the quality of its Google Search by providing a free search service for users, as each search carried out by additional users provided Google with data to improve the quality of its search engine, ultimately creating a fly-wheel effect of improved product and service quality as the user network grew.
I think a similar flywheel effect is being played out in Catapult, as it continues to be the leader in its field with roughly 3,200 sporting teams using its products, including renowned teams like Real Madrid FC, Kansas City Chiefs and the England national cricket team.
Catapult’s nearest competitor, STATSports Group Limited appears to have more than 1,500 sporting teams using its technology. Since Catapult’s listing on the ASX in 2014, it has capitalised on its first-mover advantage by striving to build the biggest database of users.
In December 2017, then Catapult Director of Marketing and now Catapult Vice President of Brand & Communications, Bo Westover, made the following pertinent comment in his interview with Sean Callanan on the Sports Geek podcast, “the more teams that are using the technology, the better the data is, because we are using a lot of machine learning algorithms, the more data we are pumping to the back-end, the more accurate it is getting at the front-end”. This approach has culminated in one of Catapult’s key products, ClearSky technology being reported as the best-performing wearable technology in world football by FIFA in December 2019.
Catapult is in prime position to ensure the fly-wheel network effect keeps growing because it possesses the largest client base, enabling it to spread research & development costs across a larger revenue base compared to its competitors. This will empower Catapult with the ability to constantly innovate and produce better products and solutions for its users.
It might be comparing apples with oranges with the use of Google as my example. Sure, they operate in different industries and offer different products and services. However, I believe Catapult shares a common and powerful trait.
Evidently, this is only one significant reason why I think Catapult is a good long-term investment, and I’m cognisant of the risk of Catapult’s customers leaving to competitors due to possible reasons like customer dissatisfaction and superior competitor products and services.
The Catapult share price has dipped a little on the back of no material changes to the business fundamentals in the past few months and I think this may be a good opportunity to invest in a business capable of dominating its peers over the long-term.
I recommend watching Owen Raszkiewicz’s podcast interview with Andrew Page, a private investor and founder of Strawman.com, which explores both different and interesting viewpoints on Catapult.
For another ASX growth share idea, check out this article: 1 ASX growth share I’d buy today with $1,000.