While acknowledging a “tougher” macroeconomic climate, BMO Nesbitt Burns analyst Thanos Moschopoulos now sees “better value” in Kinaxis Inc. after a period of share price depreciation.
“The stock has significantly underperformed SaaS peers in recent weeks, and is trading at its lowest EV [enterprise value]/sales multiple since 2018,” he said. “Based on industry discussions, we believe that deal activity is likely slowing in response to macro uncertainty. However, we believe that a deceleration has been priced into the stock, and that customer expansions (stemming from the large cohort of new wins KXS signed over the past two years) should allow KXS to sustain a healthy growth rate.”
Mr. Moschopoulos said a senior consultant at a large global advisory firm told him deal activity for supply chain planning software has “sharply decelerated” in recent weeks.
“According to the consultant, the volume of enterprise customers in the vendor selection or contract negotiation phase during Q3/23 was at the lowest level in two years —as macro uncertainty is weighing on deal activity, and as some customers aren’t feeling the same sense of urgency with respect to addressing supply chain challenges as they previously did,” he said.
“Expansions should provide KXS with a strong built-in source of growth, in our view. While we see a risk of further deceleration in KXS’s ARR growth as new logo wins potentially slow down, we think there’s a partial offset to this stemming from expansion opportunities; we believe KXS has a large hidden backlog of expansions, as the large cohort of new customers it signed over the past two years continue to roll out their multi-year deployments.”
After “modestly” trimming his revenue expectation for fiscal 2024, the analyst cut his target for Kinaxis shares to $190 from $205, maintaining an “outperform” recommendation.
“KXS’s share price is down 20 per cent since the end of June (down 23 per cent in U.S. dollar terms) relative to a 9-per-cent drop for the BVP NASDAQ Emerging Cloud Index,” said Mr. Moschopoulos. “It’s now trading at its lowest multiple since 2018, at 5.8 times CY2024E EV/sales, and its multiple is roughly in line with the SaaS group, having lost the premium it enjoyed through much of the past two years. While we wouldn’t expect the upcoming quarter to be a positive catalyst for the stock, we believe KXS’s current valuation represents an attractive entry-point for investors willing to look past a potential near-term deceleration.”