Our view: Q2/21 results were in line with our forecast with higher ARPU offsetting lower than forecast MAUs. With no change to our $31 target price and multiple MAU, monetization and M&A growth initiatives underway, we view the pullback in the shares as overdone and see current levels as a buying opportunity.
Key points:
• See pullback as a buying opportunity given structural tailwinds, potential margin expansion and M&A. With the completion of a unified cloud-based SaaS platform purpose built for enthusiast communities (‘Fora’) and a debt-free balance sheet following the IPO, in our view, VerticalScope is well positioned to accelerate M&A over the next three years. At 13.1x FTM EV/EBITDA, we believe current valuation does not fully reflect: (i) organic revenue growth that could benefit from multiple structural tailwinds and strategic initiatives; (ii) the potential for margin expansion; and (iii) M&A optionality that could double EBITDA on an NAV-accretive basis within three years.
• Notwithstanding what could be a one-off recalibration of MAUs, we see several NAV growth drivers through 2022. We attribute the pullback in the stock mainly to the run-up post-IPO alongside the MAU shortfall versus expectations (95MM versus our estimate of 100MM, 101MM in Q1/21 and our revised estimate for 2021E from 100MM to 96MM). MAU-wise: (i) management confirmed Q1 is the seasonally strongest quarter for MAUs and expects +4.3% MAU growth YoY in Q2/21 (versus +8.6% in Q1/21) to accelerate in Q3/21 with sustained organic MAU growth expected on Fora-supported websites (up +9.2% in Q2/21); and (ii) management expects to largely complete the Fora migration in 2022 (versus 90% migration in Q2/21 and 82% in Q4/20), which should provide a traffic boost with still 24% of VerticalScope traffic on legacy platforms. Monetization-wise: (i) the new product pipeline is largely in beta testing and includes vendor self-serve, marketplaces, mobile app and product recommender; (ii) digital advertising in H2/21 should benefit from impression gains, underlying CPM growth, a higher direct sales mix, $0.5MM in deferred ad spend and structural tailwinds; and (iii) renewed e-commerce growth in H2/21 could emerge despite tough YoY comps due to COVID-19. M&A-wise: (i) management is eyeing 200 targets; and (ii) in addition to the acquisition of Paddling.com in late Q2/21, the company has purchase agreements on three small acquisitions in Q3/21 (i.e., with <500k MAUs) with larger acquisitions (>1MM) in the M&A pipeline for late Q3/21 and Q4/21.
• No change to $31 target price. Following upward revisions to ARPU growth offset by an MAU recalibration, our $31 target price is unchanged. Key assumptions underlying our forecast (which excludes M&A) include: (i) a relatively stable base of 95MM-110MM MAUs through 2025E; (ii) low-to-mid single digit annual ARPU growth through 2025E; and (iii) adjusted EBITDA margins of ~50%.