The Two Best ARR models Hidden Within on the TSXV…It is a cold dark place, home to broken dreams, promises and tax losses. Its prospects, always two quarters away from being two quarters away like a once infamous Toronto Raptor Draft pick that will go without mention.
But, entangled deep between those tickers symbols concluding with “.V” and in the depths of SEDAR there often lies a diamond amongst the rough. You may have to look through a legacy business or within multiple business units but there sometimes lies an incredible revenue stream.
The stories will not screen well, they will not be covered by your large analysts and luckily for us they are often a deep discount to larger cap peers.
I want to Highlight the two best Annual Recurring Revenue - ARR Streams that you can buy today at incredibly discounted rates especially given their secular growth prospects. I think both these ARR business units are both worth multiples of the underlying stock price on a stand-alone basis in the space they occupy.
Let’s Dig in;
Route1 Inc. ($ROI.V) – Network Identity/Cybersecurity
MobiKEY Solutions - $8M in ARR that has grown Paid Users from January 2020 from 12,000 users to over 20,0000 by year end.
The Network Identity/Cybersecurity space has been red hot. So if MobiKEY was a standalone business what would it be worth?
Lets take a look at the space;
Okta Inc. - >30x Sales
Magnet Forensics Inc. - >25x Sales
Fortinet Inc. - >15x Sales
Clearly, I am not saying it should trade at that kind of valuation but high valuations across a space are a great indicator for areas I want to be hunting in and for future growth prospects for an industry. Could it be worth say 5-8x Sales if it can prove it can continue to grow users and revenues at a double-digit clip YoY clip?
So, if you put that kind of valuation on MobiKEY that gets you to a valuation range for the business unit of $40 - $64M in value or $52M at the midpoint or 1.30/share which is something like 2-3x the current share price alone.
ADD BACK: the services and hardware business which on its own will likely do $20M plus is hardware sales and $2-3M in services revenue. Lets just assign a 0.5x value on the hardware and 1x on the services.
ALL TOGETHER NOW: MobiKEY value of $52M + $10M in Hardware + $2.5M in Services = $64.5M in value or $1.60/share in value or over 3x the value of the forgotten stock today – and it’s profitable.
With an ARR style software business selling into a client list from the Navy, Pentagon and State governments you think that is worth $64.5M to a larger player? I think it’s a steal.
I also think there is a capital markets angle here to why I think we can buy it so cheap right here. If you have been following the story they sued VMWare a massive US tech juggernaut for patent infringement, looked to be able to win the case, new judge got assigned and then was settled out of court.
Do I have a legal opinion on the outcome – NO. was it an overhang absolutely, I am happy that is now behind them – YES. Then, they ran into a buzz saw now past of an 0.80/share PP traded under and people just blew out the stock when nothing fundamentally changed. The number of shares that were under distribution there for a month or so was massive. Which I used to build my position.
Martello Technologies Group Inc. ($MTLO.V) – Digital Experience Management & Analytics
Vantage Dx Microsoft365 Monitoring Business – $7.0M ARR that has already guided to grow users 30% YoY on the back of the best-selling software product in history in the Office Suite. So, they are on a glide path to be pushing $10M in ARR before their current fiscal year end growing at an impressive 20%+ clip.
All this before they even truly launch their DEM Partner program through MSPs and full launch their Multi-Tenant solution into the market which alone in recent calls they have guided up to 800K of seats through their MSPs they have ready to add and are just throttled by the onboarding process as they can only add so many per month. There is a massive opportunity to lean into SME business.
Through COVID, Work from Home/Anywhere just accelerated this trend and doesn’t look like its going anywhere for the need for a cloud-based DEM service and there is a massive runway for growth within the Miscosoft365 channel and possible expansion beyond to other platforms. These data analytics run at massive gross margin range of 80-90% with highly sticky user base as it is mission critical as if your Office Suite goes down… you aren’t doing much.
So what is it worth?
In May 2020 there was a very good comparison deal that went through, Cisco bought Thousand Eyes for $1B or for call it 10x ARR. From that point to today that NASDAQ is up another call it 30-35%.
When you look at the comp table the company uses hard to argue then against the 13-15x ARR that the peers trade at.
So, let’s do so math, we have an ARR business with 80-90% gross margins that has a growth glide path in one of the hottest secular growth areas and is tied into the best-selling software product in history. If we use the recent acquisition as the top end of our valuation range so let’s say 8-10x Sales that gives us a value on the $10M ARR figure of $80-100M or $90M at the midpoint which equates to 0.30/share which is something close to 2-3x current share price alone.
That is not all what the business has going for them, they have a very good mid-high single digit grower in ARR stream on the Mittel Analytics side that has 95% gross margins. Which on its own is a very good business.
ADD BACK: the Mitel Analytics business $7.5-8.0M ARR at 5x ARR for value of $39M in value and a sunsetting legacy sunsetting business that will generate call it $2M in ARR but lets only put a 1x ARR value on that.
ALL TOGETHER NOW: Microsoft365 DEM business value of $90M + $39M for the still growing Mitel Analytics business + $2M for the legacy sunsetting business = $131M in value or 0.40/share or close to 4x the current share price.
I get it, people don’t like the history of some of the people surrounding the name, but with the visibility into the future growth division of the company the declining legacy business is hiding what is really going on under the hood.
It’s all about revenue mix shift. From 40/40/20 or Strong/Good/Declining Growth starts to shift into next fiscal year of more of a 60/30/10 or Strong/Good/Declining Growth the headline growth figure will really start to pick up and I think it will catch a lot of people by surprise.
In Conclusion
You are able to get exposure here to two of the hottest secular growth areas in B2B SaaS in my opinion for fractions of what they are truly worth because they are hidden within one case a hardware business and the other where the growth is hidden by a declining legacy business that is now less than 20% of revenues.
These are the kind of names I want to be buying in this market where the private value of these businesses are worth multiples of what they are trading at in my opinion as they might not check all the boxes on a quantitative screen especially in tech with these high value ARR style businesses.
Cant tell me valuations are two high as I just laid out two growth ARR revenue streams in the hottest areas of B2B SaaS that I think are trading with potential 2-4x the share price on peer group multiples alone before you consider any out year revenue growth.
I smell a takeout…
LONG – ROI MTLO