Martello Technologies is an undervalued penny stock, says PI

PI Financial analyst David Kwan is staying bullish on Martello Technologies (Martello Technologies Stock Quote, Chart, News TSXV:MTLO) ahead of the company’s quarterly earnings due next week.

In an update to clients on Wednesday, Kwan reiterated his “Buy” rating and price target of $0.55 per
share, which at press time represented a projected 12-month return of 89.7 per cent. Ottawa-based Martello, a communications tech company that offers performance management, IT analytics and SD-WAN technology, has been trading relatively flat since its debut two years ago, aside from a couple of spikes.

The stock ended 2019 up 11 per cent and has been even so far in 2020.

In his quarterly preview, Kwan says he is forecasting revenue growth of 12 per cent year-over-year and 11 per cent sequentially. The analyst thinks MTLO will generate third quarter fiscal 2020 revenue of $3.5 million and an adjusted EBITDA loss of $0.8 million, which is slightly above the consensus expectation of a $3.3 million top line and negative $0.9 million EBITDA.

Altogether, Kwan is expecting the quarterly release to have a neutral impact on the stock.

Kwan says Martello has cross-selling opportunities in two of its acquisitions from 2018, namely, Savision and Elfiq, which could lead to stronger organic growth going forward.

“Total revenue growth has been flat to slightly down quarter-over-quarter in the last two quarters due to ongoing lumpiness in perpetual license revenue. However, recurring revenue (subscriptions, maintenance and support) which accounts for the vast majority of revenue (82 per cent on a last-twelve-month basis) has continued to grow at a healthy clip,” wrote Kwan.

“We expect in-line to stronger growth over the coming year, aided by MTLO executing on the significant cross-selling opportunity ahead, namely selling its Elfiq SD-WAN and Savision IT Ops solutions into its large Mitel channel and customer base,” he wrote.

The analyst thinks there’s more M&A activity to come from Martello, which ended the previous quarter with $9 million in cash and aided by a $4.6-million equity raise last September.

There has been a swell of support in recent weeks for Canadian small cap SaaS stocks, starting with the December announcement of Great Hill’s bid for VersaPay and giving a boost to names like ProntoForms, Quorum Information Technologies and Absolute Software, which have all posted significant gains.

The same can’t be said for MTLO, Kwan points out, which puts the stock at the low end of its Canadian SaaS peers. The analyst estimates MTLO to be trading at 3.3x his calendar 2020 EV/Sales estimates versus the larger peer group average of 7.3x.

In the US, Martello’s SaaS peers are trading at closer to 10x, said Kwan, including MTLO’s closest peer, Datadog, which is trading at over 24x.

Looking ahead, Kwan thinks that Martello will generate fiscal 2020 revenue and adjusted EBITDA of $13.7 million and negative $2.9 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $19.0 million and $0.4 million, respectively.