Top 5 Picks for 2022 – MicroCap Valuation Spread 700% UpsideAfter what was looking like a good year going into the last six weeks of the year quickly turned ugly across the board in the microcap space creating one of the best buying opportunities that I have seen with many names cheaper than where they were in March 2020.
After sentiment peaked the second week in February and names were going parabolic everyday followed a slow burn down the rest of the year and the momentum players moved on and a fundamental shareholder base had to step in.
In the meantime, these companies cashed up their balance sheets and just continued to execute and in many cases are now trading at much more attractive valuations as where they were before the run as growth has backfilled the valuations
With 5 trading days left in 2021 I am going to lay out my Top 5 for 2022.
Lets Jump In;
ZOMD – Zoomd Technologies Ltd.
What to Expect in 2022
This has been the breakout name fundamentally in FY21 especially with the acceleration they have seen in the back half of this year and you can see it in the accelerating YoY revenue growth every single Q of the year. (Q1: 4.04% YoY, Q2: 95.56% YoY, Q3: 140.92%, Q4: 150% estimate). Which equates to a doubling of revenue YoY on an annualized basis.
Coming off a doubling of revenue the most BULLISH part looking into FY22 is that all this growth was before they have had the Programmatic offering fully launched and in the marketplace. These Self-Serve offerings in AdTech are much more scalable and create so much room for growth within a fixed cost structure. Its such a win win for both customers and shareholders. This is where the industry is going and there is a small group within small cap CDN AdTech that are all coming into FY22 launching offerings and on a cadence basis Zoomd will be the first out of the gate fully rolled out.
On the regulatory front, with iOS14 & Google Measurement changes happening late in Q3 FY21 there are some of these AdTech names that will continue to benefit as the demonstrate the ability to measure/deliver the ROI on Ad Spend. Zoomd is right there benefiting from these industry shifts in security/measurement. Now it has never been more important to make sure you are GDPR & COPA compliant and on the right side of these shifts --see AcuityAds (relative growth rate says everything you need to know).
On a Secular basis this remains an industry that is going to continue to grow 20% annually as digital media ad spend especially on the Programmatic side continue to take ad dollars from traditional media ad spend. You see it in valuations in the space with the market leader in The Trade Desk still trading at 28x FY22 Sales. The appetite for the space and exposure for growth is not going away.
On the Numbers
$70M USD ($90M CAD) Revenue Estimate – Look for the step change in growth that was seen in the middle of the FY21 to continue into FY22. There is a lot of hidden torque within the growth of revenue here on a sector exposure here from their client base. They made a concerted effort to target growth industries with nearly 50% of the client base in growth industries of Gaming/FinTech/Ecommerce/Crypto. With these end markets growing at 20%+ growth rate on top of the billions of dollars of investment dollars that have gone into these end markets there is going to be a lot of money chasing customer acquisition through Ad Spend. You compound that secular growth rate, programmatic launch wallet share growth in ad spend & client industry growth I could end up being too conservative with my 40% growth target for FY22.
$3M USD ($3.8M CAD) EBITDA Estimate – They have done a great job of managing growth within cashflow in FY21 being profitable while doubling revenue. With the development and launch of their Programmatic offering all while being profitable is very impressive. With cash on the balance sheet and no long term debt they should still be able to finance growth within the balance sheet as they get through the cash conversion cycle coming out of Q4. With the launch of Programmatic the margin profile of the business should also improve at it is much more scalable revenue. Over the next 12-18 months you could see the margin profile creep closer to the 40% clip as adoption rate picks up. With this much growth in front of them they should continue to funnel all of it back into growth. FY22 will be more about top line growth and market share gains than profitability. Grow baby grow!
On Valuation
So looking to FY22 Zoomd is trading 0.5x Sales with 100% FY21 growth & 40% growth in FY22. Tack on the 4Qs of accelerating quarterly growth rate I have never seen a cheaper stock with such a good growth profile while being profitable.
On a comparison basis The Trade Desk trading 28x Sales w a 30% growth rate v Zoomd trading 0.5x Sales w a 40% growth rate… I don’t have anything more to add there, I think that speaks for itself.
I am not saying it should trade at those high-flying NASDAQ multiples of 20x+ Sales but even if you put a more normalized growth multiple of 4-5x Sales on the business you get to a price target range of 3.40-4.20/share or 3.80/share at the midpoint which equates to 700% upside.
That is not a typo… that is just how depressed some of the multiples have gotten in the CDN microcap space. There is something about these RTO’s that come onto the Canadian public market that take a couple years to find a shareholder base and Zoomd I think is finally at that inflection point.
A little foreshadowing here but there is a vintage of these 2018-2019 RTOs from Tel Aviv tech hub especially in AdTech that are very interesting right here that are right at inflection points in growth…
To be continued… 2/5 coming tomorrow
VERY LONG