Timing the Inflection Point & A Return to Profitability… I really want to talk about this name as it makes for a perfect example for conditions currently being exhibited in the micro-cap space. So bear with me for the next couple hundred words for a dive into the madness I find myself in when looking at these names lately. I promise to keep it under 1,000 words.
Here We Go;
Before we look forward, we have to look back. I want to start with the equity raise the company did in late 2017. They recognized that they had to shift their business to more of a SaaS based offering that could bundle their entire suite of offerings into a single product/platform.
They were able to raise a good chunk of money at 0.50/share and told everyone 2018 was going to be an investment year and the stock got crushed as costs rose in 2018 as the spent to build out their new SaaS offering. These companies are getting penalized for investing in growth…
Yet now, we hit the inflection point, LiaCX SaaS offering has been launched and growing double digits, costs are under control, yet all the investors have left and dumped the stock and the stock now trades 30% below where they raised the money. Now is the time that everyone should be loading into the name but where are they???
This is my beef I have with the micro space especially around financings, A stock gets hot and goes parabolic with promises of a SaaS offering utilizing AI technology and they raise a bunch of money then people blow out of it the first time it breaks price. Now 18 months later the management team is executing and all you hear is crickets and the stock has no support…
Inflection Point Hit
I am a very quantitative driven investor, its all about the numbers. This name has hit the holy grail – ACCELERATING REVENUE GROWTH
If you look at the last 4 Qs of YoY revenue growth each Q has seen accelerating – Q1 28.62%, Q4 13.36%, Q3 6.69% & Q2 2.05%. You overlay that with the launch of their LiaCX SaaS offering is that a coincidence, I think not.
Their business is almost entirely recurring in nature and if you look even a step deeper at the high margin Recurring SaaS revenue in the last 2Qs its averaging growth of 20% YoY.
All this with 50%+ Gross margins and a return to profitability and cashflow generation and what else could you possibly want. Business is accelerating.
Oh yeah one more thing, management owns a boatload of stock and has been buying it aggressively for the last 18 months or so ever since the stock broke below the 0.50/share level.
Cannabis/Vape Kicker
I might be reaching here a bit here and be a bit salty that I don’t play the cannabis names but INX.V has found a way to profit from it with a long runway for growth in my opinion.
Ever since the launch of retail cannabis in Canada they have had an age verification compliance program to verify age verification programs.
Recently, they won an up to $1.8M USD/annually contract with a large US vaping customer – JULL possibly... The single contract would represent aprox. 10% boost to INX.V revenue alone. Yes, and you guessed it, the stock was 0.40/share when that was announced and since, they put up a profitable Q with close to 30% growth and the stock is lower.
Valuation
This is where things just start to get silly, I am going to make a statement here and it’s not hyperbole. I truly believe this is one cheapest stock on the Canadian stock market especially as you consider the recurring nature of their revenue base.
Management has already guided to 15% YoY growth this year as their sales pipeline is robust and the launch of LiaCX their SaaS offering. Seeing they put up 28.62% Revenue growth in Q1 I think that number is in the bag.
I am using a $18M revenue estimate for 2019 which would be closer to a 20% growth rate. Clean balance sheet and profitable so no adjusting for enterprise value or balance sheet risk gets me to a valuation of 0.40x Sales. – ARE YOU KIDDING ME (Recurring Revenue & SaaS businesses trade at a peer group valuation of 3.5 – 4.0x Sales)
But wait, INX.V is playing now in a hot space of Customer Experience Management with access to and participating in the collection of big data on customer experiences and preferences. Some of the other players in the space trade at BIG multiples on a price to sales basis.
Survey Monkey – SVMK (7.5x Sales – NOT PROFITABLE)
Qualtrics – TAKEOUT (22.0x Sales – NOT PROFITABLE)
RiWi – RIW.ca (10.0x Sales – 20x P/E)
Intouch Insight – INX.V – 0.40x Sales
One of these things is not like the other things…
I am not calling for it to trade at those high elevated multiples but you can see these customer data aggregators trade at BIG multiples.
If I just put a 2.0x Sales multiple I get a target of 1.64/share or over 350% upside... That multiple seems low but the upside target seems ludicrously high, so what is wrong. I don’t know, I guess that’s for you to decide.
In conclusion, people always complain that the market is too expensive and there is nothing to buy. Well, I think I just laid out quite the case here the dislocation in the micro cap space and the opportunity it presents.
When these micro caps hit these inflection points you can get these names exploding to the upside as you get the double kicker of fundamental improvement and the rediscovery of the name that gives you multi bagger potential on a valuation expansion that I laid out above.
Good Luck to you keep buying LSPD & SHOP at >25x Sales I will stick with my micro-cap tech names at less than a tenth of the valuation that are profitable.
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