RBC Report - Reiterates $23 TargetAll -
I know that not everyone has access to the full RBC Capital Markets reports, so I'm going to post a summary below. The current share price represents an even better buying opportunity than the one seen during the nonsense in August when it got down to about 22 bucks, pre-split. Full disclosure: I bought more today.
Several items from the report are particularly striking:
- RBC reiterated its $23 price target. That's about 120% above today's price.
- ABT has 35% cash margins. That's freakin' beautiful.
- I love this bit: "We also expect to hear more details surrounding Absolute's upcoming wireless product, which will likely be rolled out to OEMs later this summer and could become the next 'killer app'". Opportunity: every iPhone/iTouch/Blackberry/Cellphone/Etc. nut and IT geek I know would love to protect their wireless products from theft. Good (profitable) times for ABT.
- International is just starting to get rolling in EMEA, and there's massive room for growth worldwide.
My not-so-bold prediction is that ABT will not be a public company within 36 months, as I believe an HP or a DELL or a Microsoft will swallow it whole for a tidy premium. Again: this thing has 35% cash margins on a highly-scalable platform. Yikes.
Here's the report summary...
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Absolute Software Corp. (TSX: ABT)
Recent Weakness Offers Buying Opportunity
Outperform
Price Target: 23.00
Checks indicate solid in-line quarter; Recent sell off is overblown; We remain buyers on weakness
Bottom Line: Shares of Absolute are down over 30% YTD vs our On Demand Index, which is down 13%. We believe the sell off of Absolute is overblown and due more to trading dynamics rather than fundamental issues with the company and remain buyers on weakness. We believe Absolute is tracking in-line with Q2 estimates with the possibility of slight upside as they continue to execute on their goal of increasing subs and adding new products. In our opinion Absolute's large greenfield opportunity combined with its 35% cash margin business makes it a core holding for growth orientated investors. Absolute currently trades at FY'08 P/CF of 18.5x vs its comp group of 22.0x, a discount that is unwarranted given its strong execution, exceptional growth profile and new product cycle starting in mid 2008. Maintain Outperform rating and $23 price target which assumes shares trade at 32.4x FY'08 P/CF, a premium to its peers but we believe is warranted by its above average growth opportunities.
Thoughts on the Current Quarter:
• We expect Absolute should post solid Q2 results which likely has upside(approximately $0.5M) to our current Q2 sales contract estimate of $17.0M vs. the Street at $16.9M. Our current sales contract estimates assumes a 82.6% y/y organic growth rate, the fastest in our coverage universe. Strength in corporate spending will likely offset seasonally lower education and government contribution while the consumer vertical should be consistent.
• Absolute is starting to gain traction in EMEA as the company was successful signing a million+ deal this quarter and could be a significant area for future growth as this market remains a true greenfield opportunity.
• We believe the company is tracking ahead of their June 30, 2009 subscriber count goal of 4M subs and could upwardly revise their estimate over the next few quarters.
• Our checks indicate that Absolute's OME relationships are as strong as ever and that Phoenix Technologies (NASDAQ: PTEC, not covered) is having limited success in launching their new FailSafe product.
• We also expect to hear more details surrounding Absolute's upcoming wireless product, which will likely be rolled out to OEMs later this summer and could be come the next "killer app".
Valuation
We believe Absolute has the opportunity to grow sales contracts in the 40%-50% range during the next few years and a 24.6% 10 year CAGR as it continues to take share in a greenfield market. Despite the rapid increase in the stock over the past 12 months from less than $6 a year ago to more than $35 today, we think the stock is undervalued primarily because we believe management's 4 million subscriber goal for June of 2009 is conservative. Furthermore, we believe investors should evaluate shares of ABT on sales contracts or bookings and cash flow metrics based on its sales model vs. traditional revenue and earnings multiples, which are lagging indicators for Absolute. As evidence, ABT is trading at approximately 12.3x 2008 sales vs. the comp group at 4.8x and isn't expected to achieve GAAP profitability for the next several years.
Therefore, to give Absolute credit for its subscription model and greenfield opportunity, we believe a P/CF and P/CF/G (Price/Cash Flow/Growth) ratios are the most appropriate metric for ABT. Currently ABT trades at a 2008 estimated P/CF ratio of approximately 18.5x vs. the comp group at approximately 22.0x and a 2008 estimated P/CF/G ratio of approximately 0.51 vs. the comp group at approximately 0.66. We reiterate our Outperform rating and $23 price target which assumes shares trade at a P/CF ratio of 32.4x and a P/CF/G ratio of 0.89 and is also supported by our DCF analysis.