Accelerating Rev Growth & Secular Shift Taking Valuations UPThis is hands down my favourite way the play the boom in housing, especially in the US and there were three events that happened in the last couple months that the lead me to pound the table even more right here;
I strongly believe that this is the on of the best growth names to take advantage of secular shifts in behavior at a well below peer group multiple. Take it from one millennial priced out of the residential housing market, the price appreciation and the locked in value in property that can be tapped and magnified is massive with US Home Price Index Accelerating to be up more than 10% on a YoY basis now.
Q4s Out of the Home Depot & Lowes
Hover Equity Raise in the Private Markets
Matterport go public via Gores Holdings VI Inc (GHVI)
Q4s Out of the Home Depot & Lowes
In the last two days the two bell weathers in the Home Construction & Remodel space both came out with Q4 numbers.
Home Depot – 25% YoY US Same Store Sales Growth (Accelerating rate of growth QoQ)
Lowes – 29% YoY US Same Store Sales Growth (Accelerating rate of growth QoQ)
The same trends that we have seen throughout 2020 accelerated into year end. In the last 4Qs RW.V Design Service growth has grown at over twice the pace of the Home Depot/Lowes SSS growth at a faster and faster pace accelerating up to 96.55% Growth YoY in Q3. The setup here into Q4 is amazing as the core driver of growth accelerated even further in Q4.
Hover $60M Series D Raise
Hover raised another round of financing raising $60M USD valuing the direct comp in the space at $490M USD brining the total amount raised to $142M USD. With the company saying it expects to reach an annual run rate by yearned end of $70M USD. (I don’t hear any talk about profitability….)
You start extrapolating that kind of valuation to RW.V of a 7x Sales Run rate revenue figure even though Hover is still burning millions of dollars and RW.V is now profitable with cash in the bank numbers start to get real interesting. If we say that exiting 2020 RW.V will be at a 5.5-6.0M Revenue run Rate that is a $42M enterprise value business, you are starting to look at 1.00-1.10/share stock price.
Matterport Go Public Via SPAC
This has just taken things to another level. This is all around the same secular theme of digitizing and collecting data about the spaces around you. Matterport, Hover, AutoDesk & RenoWorks I put them all in the same broader category.
And the market just ate it all up and the enthusiasm around the broader space has done nothing but take valuations higher and higher.
For example, Matterport went public at $2.9B USD w and estimated FY21 Rev of $123M USD for a Price to Sales multiple of 23.5x Sales. (Once again, no talk of profitability…) The market didn’t stop there, it has almost doubled in under a month and has taken the valuation closer to $5B market cap or now we are talking about 40x FY21 Sales.
Personally, I think paying 40x Sales for anything is not advisable even though its been the right strategy the last 12 months… Take that for what it may I think the broader point here is that the interest in the space and the improving sentiment and the thought process around the digitization of understanding of spaces for visual rendering or application purposes is taking off. This secular them is just starting with a long run way. Just for fun, lets take a quick peak at what that valuation metric would look like, at 20x Sales would be >3.00/share and 40x Sales would be >6.00/share. A kid can dream.
The strategic value of these smaller tech names that are profitable and growing increase in value as the larger cap names go parabolic on the valuation front. Just increases the optionality to win, whether it be valuation re-rate of the existing business or M&A by getting taken out by the big fish.
On the Numbers
I still don’t think the market understands the growth that is under the hood in the Design Service business. The rate of acceleration through COVID and as it grows to be a larger and larger percentage of total revenues it moves the top line revenue growth more and more.
Design Services Revenue – Q3 96.85%, Q2 60.64%, Q1 49.94% & Q4 47.05%
All the while as a percentage of Total Revenue that is Design Service increases
% of Total Revenue - Q3 54.23%, Q2 52.22%, Q1 42.80% & Q4 34.48%
There is no stopping that trend now, COVID brought upon a secular shift how certain sectors operate and they are not going back.
So where are we, In my base case I am at $6M in revenue for FY21 on a cash breakeven basis as they invest back into the business to continue the growth in their red hot Design Service Business.
So the question becomes, how do you value profitable SaaS business pushing up against a Rule of 40 growth name in on of the hottest sectors of economy?
The public market is so BULLISH on the space whether it be AutoDesk at 15x Sales or the hot new play Matterport at 40x Sales. Or even on the private side with Hover getting a fresh capital injection at 7x Sales looking more and more like a bargain every day.
Let’s use a 5-8x Sales multiple and apply that on our $6M FY21 revenue target to get a target price of 0.75 – 1.25/share or 1.00/share at the midpoint so I think there is still 100% upside to the stock in the next 12-18 months if they continue to execute on the 50%+ growth in the Design Service revenue line.
In Conclusion
I think this business is right at that critical inflection point, where the growth driver of revenue is now just poking its head above 50% of total revenue. As a result, the top line revenue figure has the ability to accelerate into FY21 as it starts picking up that underline growth on a headline basis.
I really don’t think you can find a better secular bet in this market with SaaS operating leverage to the upside. I think there is an interesting inflation hedge in here as well, as the Design Service Revenue I believe is on a percentage of bill basis, so as the underlying costs of building supplies and labour increases so will the Design Service Revenue.
LONG