Coveo Solutions Inc T.CVO

RBC Raises Target

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Their upside scenario target is $19.00. GLTA

November 16, 2023

Outperform

TSX: CVO; CAD 9.95

Price Target CAD 14.00 ↑ 13.00

Coveo Solutions Inc
A growth inflection is coming

Our view: We attended Coveo’s second Capital Markets Day. Global awareness of GenAI is driving a surge of demand for enterprise search and other foundational data technologies, which are crucial underpinnings for GenAI. Coveo has several large potential catalysts that we believe are likely to help re-accelerate bookings and SaaS growth over the next several quarters. We believe high-profile customer wins and improved growth would lead to an upward valuation re-rating of the stock. We maintain our Outperform rating and raise our price target to C$14.00 from C$13.00.

Key points:

• A surge of demand for enterprise search. Awareness of GenAI has re- invigorated the enterprise search market, as enterprises are looking for foundational technologies to help enable GenAI. This is visible in Coveo’s sales pipeline, which has increased 85% Y/Y despite macro and Coveo’s limited spending (sales & marketing up only 3% Y/Y).

• Growth re-acceleration appears likely. We forecast Coveo’s SaaS growth to re-accelerate from 12% Q3/FY24 (Dec-24) to 25% Q4/FY25 (Mar-25). The uptick in growth stems from: 1) Coveo’s new GenAI offering; 2) its recently formed partnership with SAP (10% of SAP’s Commerce install base = >$50MM ARR); and 3) sales into Coveo’s install base ($50MM ARR opportunity). We expect bookings (i.e., RPO) to ramp at a faster pace given the current pipeline (70 potential customers) and general availability in December.

• Search is a key foundation for GenAI. Coveo has only penetrated 3% of its 21k customer TAM. Most organizations have not adopted AI/ML- based enterprise search (up to 2018, 85% of Coveo’s install base was tech companies). GenAI is the killer app that will drive increased adoption of enterprise search, as many enterprise GenAI use cases are intertwined with enterprise search. Xero’s launch of Coveo’s GenAI offering and SAP’s recent endorsement of Coveo validate the company’s technology and value proposition.

• Commerce is a new emerging GenAI opportunity. Commerce is Coveo’s fastest-growing pillar. Commerce ARR is up 50% Y/Y and Coveo’s commerce pipeline is up 300% Y/Y. Coveo’s partnership with SAP is initially focused on its 3,000 commerce customers ($1T GMV). While Coveo is initially targeting AI/ML search optimized for commerce (i.e., increase AOV, revenue per visit, conversion rate, margin per visit), an emerging opportunity is seamlessly blending GenAI with AI/ML-based search. One of Coveo’s five GenAI deals signed Q2 was in commerce.

• Valuation likely to continue re-rating upward. Coveo is trading at only 4.4x NTM EV/S, below peers at 8x. We believe Coveo’s valuation is likely to re-rate upward given: 1) expected re-accelerating RPO and SaaS growth; 2) visibility regarding new high-profile GenAI customer wins; and 3) improving profitability. Our increased price target of C$14.00 (previously C$13.00) equates to 6.3x CY24e EV/S, up from 5.8x previously given increased likelihood of growth re-acceleration but below peers given Coveo’s historical discount to peers and smaller size.