I am going to use ARR without a lag to estimate valuation. This is a simplification but LVT now has $10m per annum of consulting and installation revenue that it does not include in ARR.
I am going to use a more conservative number of shares than TEP because I am going to include the shares issued for CYCL and I am going to assume that Wizdom's founders earns their full performance payout in shares. That gives me a total of 925. 5 million shares. Obviously if the ARR disappoints then the # of shares will be lower.....but for simplicity Im going to set the higher hurdle.
If the share price is going to remain at 28 cents, that means a market cap of $260 million at December 2020 If the share price is going to rise 50% that implies a December 31 2020 market cap of $388 million If the share price is going to double, that implies a December 31 2021 market cap of $518 million.
28 cent valuation For the downside valuation, I am going to assume that investors value the company at 4.4 x ARR and totally ignores the consulting revenue. The 4.4 xARR is based on sample of US valuations of sub 10% growth SAAS companies with negative cash flow...and I am ignoring the consulting revenue to apply a harsh hurdle. 260/4.4 = An implied ARR of $59 million. Current ARR is $47.6 million. So a share price of 28 cents assumes quarterly ARR growth of $2.85 million. (59-47.6)/4 without seasonal adjustment. Coincidentally, (or maybe not) the disappointing end September report was +$2.9 million of ARR growth. So if you expect 28 cents share price by year end, you are expecting the quarterly ARR growth to have truly slowed to that level of growth going forward. September was not a blip, it was the new growth rate.Those selling the shares at 28 cents are expecting no better growth than $2.85 m of ARR per quarter.
28 cents + 50% in next 12 month valuation For this valuation I assumed a 6 X ARR valuation with no consideration for the consulting revenue 388 /6 = An implied ARR of $64.7 million by December 2020 64.7 million- 47.6 million = $17.1 million of growth over the next 12 months 17.1 million of growth = $4,25 million of growth in ARR per quarter
Incidentally, I think this is harsh because a quarterly growth of $4.25 million per quarter is 35% growth which would imply a ARR multiple in excess of 6X ......but everyone can use their own valuation hurdles. In our view if the company is growing by $4.25 million per quarter, you are not going to sell the shares because whether that implies +50% or +65%, you can worry about that later.
28 cents + 100% in next 12 months valuation For this valuation we assumed 7.0 x ARR 518/7.0 = An implies ARR of $74 million, which represents a growth rate of 55% or a quarterly growth in ARR $6.6 million,...and at that rate they reach the $100 million target by December 2021 (their original target date for $100 million before they brought it forward)
In reality if the company is growing at 55%, then the multiple will be closer to 10X which would be an 80 cents share price.... but at 28 cents we dont need to make those kind of assumptions.
Conclusion: The market is telling us to expect somewhere between $2.9 million and $4.25 million of quarterly ARR growth. There has been some chunky buying on weak days which might tell us that someone is expecting a better number than that
Interestingly our model , which was so badly tripped up in September, would have been forecasting $6 million this quarter. I recognize that the stock price is saying it expects the number to be lower....although there has been some buying at these levels.
Apply your own ARR multiples and let the market tell you what it expects the ARR to be in December 2020 and then calculate what kind of quarterly growth that implies........Enjoy doing your own models.
(20min delay)