There was a very large cross yesterday at around 30 cents, probably an institution or HNW individual who retained someone to find them stock.. That is an illiquid position to acquire so someone thinks it is worth more than the current share price. Then there was some follow through at 30.5.
We are all familiar with the base case;
Base Case:
- Cloud based Intranet software providing customers with a flexible low-code portal (so that customers can customize and update their intranet home pages in a cost effective manner , and plug in some AI tools for employee efficiency) is a rapidly growing early-stage space in enterprise software.
- LVT is the largest company in the space, about 2X the size of next closest competitor and has been growing at over 100%..
- Company is targeting 60% per annum growth to get to approx $100 m ARR by June 2021.
- If they achieve those targets, it is not unrealistic to assume a valuation of > than 12x ARR for a company growing at that rate in a vertical with over $8 bn TAM (Total Addressable Market.) That would suggest a target valuation of approximately $1.2 bn...., which is close to 5x the current share price.
- All shareholders and forum members would be ecstatic!
However, given the recent quarter where for the first time, the company missed quarterly expectations and the market response combined with the prior overhang of a capital raise......it is worth perhaps reversing the equation and asking ourselves two questions:
1. What is a downside case scenario and valuation.
Closely related to that question:
2. What growth rate is implied by the current market capitalization.
I find it very useful to have a downside case.....it sets up metrics for measuring required progress against a disappointing SP.
IMO, the downside case would be that the company's growth has slowed dramatically and that the company will not reach critical scale to remain independent. Private transactions and public company acquisitions of SAAS software get valued in two ways. The first measure is EV/ARR. The second is EV/EBITDA after stripping out the costs that the acquiring company will remove (as it gets rid of senior management and folds the product into its own sales force)
Acquisition valuations of SAAS when the company is not making it to scale vary widely. I used a conservative 6X ARR and checked it with 12 X EV/EBITDA so assuming a good value for the acquirer.
If we assume a worst case that the slower growth of Q1 (September) is maintained on a seasonal basis then the growth rate has slowed to 33% and ARR by June 2020 will only be $53.4 million. Cash will likely be down to $41 million since revenue growth will also be slower than expected.
EV/ARR would suggest a EV of $318 million + Cash of $40 million for market cap of Approx $358 million.
Estimating EBITDA to an acquirer:
1) They would cancel N3 saving $3.4 million per year
2) Im estimating they might reduce, non production and non marketing sales force by approx 60% , leaving internal staff costs at $7.5 million.
3) Marketing and sales would be reduced by half leaving a marketing expense of around $4.0 million
4) Corporate would go
5) Production and opex would stay at $10 m.
6) R & D $3.2 million (im assuming someone is consolidating in the space)
So total costs of $25 million with ARR of $54m suggests EBITDA of approx $29m x 12 = $348 m + 40 m cash = approx $390m market cap.
The middle of the range is a market cap of $375 million (unadjusted for performance payment to Wizdom because we are assuming poor performance) which would imply a share price of around .45 cents in a downside scenario.
The market is currently assuming worse than this, so what would the growth have to look like for the share price of 30 cents to prove to be right?
$250 million market cap - $40 million of cash (post cash burn) = EV of $210m.
210/6 suggests an ARR of $35 million
Lets try 5 X EV/ARR for a distressed sale. 210/5 = $42 million ARR. This amounts to the market estimating that there will be zero growth.
The market is thus suggesting either that LVT will not grow at all over the next 3 quarters ......
or that if it only grows at a meager $3 m ARR per quarter for the next three quarters ( reaching $52 million in ARR by June 2020), then the company valuation will have to fall to an EV/ARR of only 4X (which is massively below private transaction prices).
So never mind what you actually think ARR growth will be in December........looked at this way, the market is pricing in somewhere between 0 growth and $2m per quarter growth.
Just some random thoughts, and a possible explanation why someone scooped up a large block of shares..
(20min delay)