Post by
retiredcf on Oct 29, 2024 12:45pm
CIBC Initiates Coverage
EQUITY RESEARCH
October 28, 2024 Initiating Coverage
KNEAT.COM, INC.
A High-quality Solution
Our Conclusion
As of October 28, we initiate coverage of Kneat with an Outperformer rating
and a $6.00 price target. Kneat’s cloud-based eValidation software has been
adopted by a majority of the largest pharmaceutical companies, leading to a
three-year annual recurring revenue (ARR) CAGR of 84%. We believe that
Kneat’s strong product, established market position, land-and-expand sales
approach, and ability to target new verticals will allow it to continue to grow at
30%+ rates through 2026 while realizing operating leverage as the business
scales. Validation is an under-digitized, mission-critical activity and Kneat
stands to benefit from digital transformation within the validation space. Our
$6.00 target is based on 6x 2026E sales, a slight premium to life sciences
software peers but a discount to a broader best-in-class SaaS peer group. In
an upside scenario where Kneat outperforms our growth forecast, we see
potential for multiple expansion that approaches premium SaaS peers.
Investment Thesis
Market Leader With Room To Grow: Kneat has established a leading
position in the eValidation space, with eight of the 10 largest pharma
companies using Kneat’s platform. Kneat’s land-and-expand strategy has
driven impressive ARR growth and net revenue retention (138% in 2023),
and we believe Kneat can continue to drive growth through expansion and
new customer wins. Half of Kneat’s revenue growth in 2023 came from Top
10 customers expanding their share-of-wallet, emphasizing the strength of
the product and potential for continued expansion across the customer base
.
Validation Is A Mission-critical Activity: Validation is a niche but crucial
function in a regulated manufacturing environment. Despite being a critical
activity, the majority of validation work is still done on paper and Kneat’s
purpose-built eValidation tool is helping the industry transition into a digital
future. As regulated manufacturers continue to digitize validation across sites
and validation processes, we believe Kneat will be a primary beneficiary.
New Verticals Extend Growth Opportunity: Kneat was designed for the
pharmaceutical industry, but eValidation has utility in any industry with heavy
regulatory compliance. Despite focusing sales efforts on the pharmaceutical
vertical, Kneat has begun to expand into additional markets such as medical
devices and consumer packaged goods (CPG). Initial wins in new verticals
serve as proof points for future expansion, giving us confidence that Kneat
can extend its growth runway by targeting new markets.
Growth & Path To Margin Expansion Warrant Premium Multiple: With
expectations of sustainable long-term growth and margin expansion,
including 33% revenue growth and positive FCF in 2026E, we believe Kneat
deserves a premium multiple. Our 6x 2026E sales target multiple is a slight
premium to life sciences software peers, but a discount to the upper end of
that peer group and a discount to top-quartile SaaS businesses with similar
growth and FCF profiles. We believe growth expectations are within reach
and see room for additional multiple expansion if growth outperforms