Stifel Stifel analyst Suthan Sukumar sees Coveo Solutions Inc. as “well positioned to ride surging GenAI tailwinds” after hosting recent investor meetings with a pair of its executives.
“Discussions ranged from AI & LLMs [large language models], the state of enterprise search, to the macro and M&A, but ultimately, our key takeaway was more appreciation for Coveo’s rapid execution to-date in bringing a highly differentiated GenAI product offering to market, thus positioning the company early and competitively for surging enterprise AI tailwinds,” he said. “Growing momentum with the SAP partner channel and the upcoming product cycle with GenAI reaffirm our view for re-accelerated revenue growth and profitability, with the latter yet to be reflected in current FY guidance nor current Street near and long-term forecasts. Upcoming FQ2 earnings and a Capital Markets day in the November timeframe could serve as a near-term catalyst given incremental updates on the company’s GenAI rollout and timeline to bookings and revenue growth.”
After discussions with chief financial officer Brandon Nussey and chief business office Nick Goode, Mr. Sukumar predicts stronger bookings growth are ahead for the Montreal-based company, which he emphasized is a “leading indicator for re-accelerating revenue growth.” He also expressed a “high confidence” on profitability and cash flow for the coming year.
“Coveo continues to outperform bottom-line expectations as they pull in their timeline to profitability/positive cash flow generation (current target remains fiscal 2025 (calendar 2024) vs. fiscal 2027 at time of 2021 IPO),” he said. “Growing SaaS [software-as-a-service] scale, with more efficient utilization of AWS [Amazon Web Services], their core cloud-provider, has been a key lever for improving overall leverage, as reflected in robust more than 80-per-cent product gross margins. On the opex front, management remains disciplined on spend, prioritizing investments to support key growth initiatives, namely GenAI and SAP/partner channel engagement currently, while scrutinizing all else. The company’s product pivot to GenAI was more of a R&D roadmap re-prioritization effort vs. having to stand up a separate division with new staff, thus requiring only incremental investment. The record pipeline seen last quarter has yet to reflect any contribution from GenAI, hence management sees opportunity to expand sales capacity as the new offering progresses through the early access program and into GA. Higher pricing power on GenAI bodes well for higher margins long-term, but anticipated compute/cost requirements for LLM use in the early days could drive some variability in the short-term.”
Seeing Coveo’s valuation as “attractive,” he reaffirmed a “buy” rating and $14 target. The average on the Street is $12.75.
“Coveo shares currently trade at 4.5 times calendar 2024 estimated Sales, well below AI/data/analytics peers at 10 times and Lrg/SMID-cap SaaS peers at 8.5 times/6 times,” Mr. Sukumar said. “Our $14/share target is based on 6 times, a modest discount to reflect Coveo’s smaller market cap, lower near-term growth profile, and unprofitability, but in-line with comparable SMID SaaS peers. We see potential for the stock to re-rate closer to AI/data/analytics peers with continued, strong execution, particularly around the GenAI opportunity, with increasing visibility to profitable growth.”