PI Financial analyst David Kwan thinks Ottawa-based network performance analytics software firm Martello Technologies (Martello Technologies Stock Quote, Chart, News TSXV:MTLO) is undervalued.
In a research report to clients today, Kwan initiated coverage of Martello with a “Buy” rating and a one-year price target of $0.50, implying a return of 52 per cent at the time of publication.
Kwan says he began his research on MTLO by speaking to the company’s partners and customers and says he came away impressed simply by the cross-selling opportunity the company has to onboard existing customers with one or two of the other solutions it offers.
“All the customers and partners were (very) happy and satisfied with MTLO’s solutions and service and all have had a relationship with MTLO for at least 5-10 years,” the analyst notes.
Kwan says this internal opportunity is very real and is the runway for it is quite long.
“Like most of its other customers, the ones we talked to only used one platform/solution, which is not surprising given MTLO’s acquisition activity only started to pick up ~1.5 years ago,” he writes. “Accordingly, there are plenty of cross-selling opportunities ahead to help augment its robust growth profile. The customers we spoke to were aware of MTLO’s other solutions and either had interest in learning more or already had plans to make additional purchases. Given various resource constraints at its customers (e.g., personnel, budget), we believe it could take a couple of more quarters before cross-selling opportunities begin to have a noticeable impact on the top line.”
Kwan thinks MTLO will post Adjusted EBITDA of negative $1.9-million on revenue of $14.9-million in fiscal 2020. He expects those numbers will improve to Adjusted EBITDA of $400,000 on a topline of $19.0-million the following year.
Martello Technologies’ solutions are “sticky”, Kwan says
Kwan also notes that Martello’s customers are unlikely to leave anytime soon.
“We were told that MTLO’s solutions are very important/critical to their businesses, as they enable IT and external partners to proactively identify and address potential issues/problems as well as quickly respond to ones that pop up, helping customers save time and money. Consequently, MTLO has experienced low churn.
The analyst adds that the bump the stock received after Bruce Linton parted ways with Canopy Growth has mostly subsided, offering a good entry point for new investors.
“Our target price is based on 5.0x our FY21 Sales estimate,” he sid. “The stock is now returning to levels closer to its very recent pre-meteoric rise (driven by Mr. Linton’s departure from Canopy Growth). While there could be some more downside in the near-term (as the euphoria continues to temper), we believe the risk/reward looks attractive given the robust growth outlook.”
Kwan says potential upside to his target could come in the form of acquisitions.
“Despite an active M&A strategy, our estimates do not bake in any acquisitions,” he cautions. “Co-Chairman (and former CEO) Bruce Linton has recently commented on his plans to spend more time helping MTLO assess and execute on acquisitions to help accelerate their growth strategy.”