VerticalScope Holdings Inc.
(FORA-T) C$6.48
Returning to Revenue Growth as Reddit Nears
Event
Q4/23 results.
Impact: SLIGHTLY POSITIVE
Results from the quarter were above our expectations, outlined on page 4, and FORA
should have reached a trough year, in our view, with an improved outlook for the
advertising market and the ecommerce business setting a lower bar to grow off.
The outlook commentary on 2024 is encouraging, and we believe there is strong
potential for the momentum to continue into 2025. We cite positive commentary from
management on page two, but the key takeaway is that opex can be held relatively
stable, such that the return to growth on top line can drive margin expansion off
of the 39% achieved in 2023. The drivers of top-line growth will include improved
advertising revenue and trough-level ecommerce revenue in 2023, as the drag from
The Streamable should subside in 2024. Putting these items together, our revenue
and EBITDA estimates have increased.
TD Investment Conclusion
Our updated estimates alone, with no changes to our target multiples, would have
been more than sufficient to support a Buy rating. That said, we are upgrading our
rating to ACTION LIST BUY (from Buy), with an increase in our target multiple to 8.0x
EBITDA (3.4x revenue versus 6x-8x being cited in the media for Reddit) and a roll
forward of our target valuation to 2025 with a 5% time-value discount. As such, our
target prices increases to C$12.00 (from C$7.50 previously). Our upgrade is driven
more by the company's potential beyond what is included in our official forecasts,
namely a potential content agreement with GenAI providers similar to those that
we have seen recently at Reddit and Thomson Reuters. We understand that these
content agreements are high margin in nature, and would pose a material upside of
up to ~$18/share for VerticalScope (we provide more details on page 2).
We are further comforted by the fact that management indicated its intent to
commence share repurchases, particularly if valuations remain attractive, together
with the restart of tuck-in M&A activity with the use of cash, as opposed to equity
issuance. Both items indicate to us that management is confident in its ability to
generate FCF in the near term.