5 Top Picks for 2023 –The Preeminent TSXV Growth Story…Time to go digging through the rubble of the AdTech trade. The darling trade of 2021 which saw so many raise so much capital at elevated valuations only to see their valuations and growth rates collapse into 2022.
The pain trade in 2022 but I still love the space, these business models are so scalable that when they reach a level of critical revenue base they start to print money.
Going to follow the same set-up as I did with the prior names for 2023
Premier Health Group of America Inc - $PHA.V
https://stockhouse.com/companies/bullboard?symbol=v.pha&postid=35188947 Spark Power Group Inc - $SPG.TO
https://stockhouse.com/companies/bullboard?symbol=t.spg&postid=35215084 We are going to looking for 5 criteria;
1) Accelerating Revenue Growth 2) Expanding Gross Margins
3) Expanding EBITDA Margins
4) Manageable Net Debt/EBITDA
5) Trough Valuation on Recovering 1) 2) 3) 1) Accelerating Revenue Growth – This one is tough, because at the end of the day you are beholden to the macro and without question this is going to be a tough year for the broader ad market.
With that being said, have to look a little closer with these AdTech Names. All about end market and these guys are in the sweet spot of transition of Linear TV viewing habits to OTT/CTV & Mobile viewership that are bucking to broader ad slowdown.
(For example, even during the financial crisis in 2008 the digital ad market still put up a positive growth rate in the toughest macro environment – secular growth matters) With OTT/CTV ad market being the fastest growing area of the ad market. There is an interesting mix shift story here which helps to accelerate the growth rate for their traditional mobile business which is still no sloth.
Connected TV/OTT Revenue Growth FY22 – 144% YoY (51% of Revenues)
Mobile Revenue Growth FY22 – 41% YoY (49% of Revenues)
For the first time the high growth CTV/OTT division is now >50% of sales and with 3x the growth rate of the mobile division this will allow the growth rate to remain elevated for the foreseeable future even in the face of macro headwinds.
The most impressive thing here is we saw re-acceleration in the growth rate in Q3 QoQ even in the face of ad market that quickly deteriorated as we went through 2022 and were comping against a booming 2021 figure. So, what is driving this? Clearly there is an organic growth story here but it has to be noted that there is likely a 20-30% boost to the top line growth for political ad spending that will lead to a MASSIVE Q4 reported but will lead to tough comps into the back half of 2023.
(I think they could top up that growth rate with a little M&A tuck in this summer on the cheap) 2) Expanding Gross Margins – As you move down the income statement here the story gets better and better especially on a relative basis to other AdTech peers. This is one of the few names that has been able to hold onto and even expand gross margins into the Ad slowdown with a 60%+ margin
If we look at it on a YoY basis so far in 2022 Gross Margins running 60.6% vs 60.4% in 2021. They have been one of the few names in the space to be able to hold onto a >50% gross margin structure without sacrificing the top line growth rate.
On top of this success, they are sitting on a secret weapon going into 2023 – AppScience Analytics Product.
There higher margin analytics product that is complimentary to the pre-existing business lines that just rolled out in force this year that has gone from zero to over $1M+ in annual run rate revenue has the ability to cross-sell across clients and two push the higher margin CTV/OTT revenue stream even further into 2023.
Q3 AppScience Revenue - $223K USD ($301K CAD)
Q2 AppScience Revenue - $159K USD ($215K CAD)
Q1 AppScience Revenue - $2K USD ($2K CAD)
3) Expanding EBITDA Margins – This is where I get really excited about the name. I just want to point out I love how the company expenses all R&D salaries they do no burry R&D costs into intangible assets on the balance sheet. As a result, the EBITDA number is a much cleaner number that a lot of garbage in tech nowadays.
The first half of 2022 was rough without question, as the cost structure continued to balloon alongside gross profit dollar growth. But management kept assuring us that the cost structure will start to stabilize on a OpEx growth basis going into second half 2022 and into 2023 as the US sales infrastructure got built out for their advocacy division and started to reach and plateaued level to support the business next leg of growth.
Then would you look at that, we finally started to see the light at the end of the tunnel in Q3 with OpEx growth decelerating to the point where gross margin dollars are starting to grow faster. With management stating the majority of the spend is in the rear-view mirror.
With such a high Gross margin figure and a stabilizing OpEx structure as the business grows into 2023 it will not take too much incremental Gross margin dollars to drive EBITDA growth.
Now its just a question how hard you push of the growth button. Personally, I think it make more sense to hunker down on the cost side and maybe to tuck in another Vidlion or two in 2023 then to really push for that extra point or two of growth.
But in the last two years they have been able to 3x the size of the business within cashflow so I trust their judgement here. 4) Manageable Net Debt to EBITDA ratio – I think I already touched on this, there was so much capital raised across the AdTech space so many of these companies have rock solid balance sheets with net cash.
Sabio is no different, with access to a line a credit and Cash equal to outstanding balance on credit line it’s a non-issue given they are running the business on a cashflow positive business.
Once again, I would just hit on the fact here that management is well aware and are committed to running the business on Cashflow positive basis. Always will be a little lumpy with these AdTech businesses as so much of the business in back end weighted but they have the balance sheet to flex the spend up or down as they see fit –
BUT GOSH DARN IT YOU BETTER KEEP IT EBITDA PROFITABLE OR I AM GOING TO LOSE MY MIND WITH ANOTHER ONE OF THESE MANAGEMENT TEAMS NOT READING THE ROOM W THE CHANGE IN MARKET SENITMENT TO PULL THE REIGNS BACK ON ALL OUT TOPLINE GROWTH. 5) On Valuation – This is the tricky part here; I believe this is best growth (>20%+) story in the market and have executed very well since they went public in 2021 and the stock has only gone down. But with rates toping out this is when I think you have to start accumulating these long duration assets.
Let’s say for FY23 I get to an estimate of $50M USD ($67.5M CAD) in revenue with the core business continuing to outperform the secular growth rate but will get some deceleration into the back half of the year when they start comping against the 2022 Midterms revenue bump.
So, to keep this a rule of 40 name which management has highlighted as they grew into the cost structure in 2022 will see OpEx growth <20%.
I believe they can thread that needle on balancing growth and OpEx.
On a Comparable Basis for the AdTech players I think you have to look at these names on a Gross Profit Basis not a Sales basis due to reporting differences between names. Projecting out a 60-62% Gross margin figure gets to $30.5M USD ($41.2M CAD) Gross Profit Dollars in 2023.
A very smart tech investor once told me, you tend to do well buying profitable growth at 1.0x Gross profit – Good things tend to happen...
Take-over. Cough cough cough Putting a 4-5x Gross Profit Multiple on a Rule of 40 grower gets me to a price target range of 3.30 – 4.10/share or 3.70/share at the midpoint for a casual 310% upside target. So there it is, the premier growth story on the TSXV that has reached a level of scale where they are going to start to mint cashflow at the same time their business unit that has 3x the growth rate as the legacy business becomes >50% of the sales base. I still don’t think people realize how big this shift from linear to OTT/CTV and you can just look at the growth rate here to other players. With both Netflix & Disney both coming out with Ad supported offerings this year is going to wake up a lot investors to the space. LONG