PI Financial analysts Gus Papageorgiou and David Kwan think tech investors should be looking at smaller cap companies in the SaaS space because that’s where the deals are.
In a tech sector update on Monday, Papageorgiou and Kwan gave a list of Canadian SaaS names worth considering, including large caps like Shopify (Shopify Stock Quote, Chart, News TSX:SHOP), Lightspeed POS (Lightspeed POS Stock Quote, Chart, News TSX:LSPD) and small caps Martello Technologies (Martello Technologies Stock Quote, Chart, News TSXV:MTLO) and ProntoForms (ProntoForms Stock Quote, Chart, News TSXV:PFM).
Looking at the space as a whole, Papageorgiou and Kwan said there’s currently a large valuation gap between large and small cap SaaS names, where the former are trading at almost 396 per cent higher multiples than the small caps, even when the latter are showing very strong growth.
“For investors that are able, we believe switching from larger to smaller cap SaaS names may be a strategy worth pursuing. Although liquidity is often an issue, some of these smaller names maintain very strong competitive advantages, compelling business models, and high growth profiles. The smaller capitalization limits potential investors but also creates a solid opportunity for those who can invest,” Papageorgiou and Kwan wrote.
“We also note the potential upside from M&A, as highlighted by the $126-million acquisition of VersaPay by Great Hill Partners at the end of 2019. The deal valued VersaPay at over 9x NTM EV/Sales and helped lead to a re-rating in several small cap SaaS names,” they said.
According to the analysts, the cheapest name among the bunch is Martello, which trades at 2.2x EV/Sales (calendar 2021). Martello, which has digital experience monitoring (DEM) solutions for analyzing real-time applications, is set to reaccelerate following the sale of its declining and money-losing Elfiq SD-WAN business, according to the analysts, who are calling for NTM revenue growth of over 65 per cent and for the company to return to positive adjusted EBITDA within a few quarters.
Lightspeed also got centre stage for its solid Q1 2021 recent results that showed 57 per cent year-over-year growth despite the COVID-19 pandemic.
On Montreal-based Lightspeed, which offers a point-of-sale platform for restaurants and small and medium-
sized businesses, Papageorigiou and Kwan estimate LSPD to be trading at 15.1x EV/Sales with an estimated sales NTM/LTM sales growth of 49 per cent.
“Lightspeed’s growth should rival Shopify’s but it is trading at the lowest multiple of any of the larger cap SaaS names. It remains one of our top picks to play a COVID economic recovery,” they said.
The analysts reiterated their “Buy” ratings for both Martello and Lightspeed, maintaining a target of $56.00 for LSPD, which at press time represented a projected 12-month return of 38.0 per cent, and a target of $0.45 for Martello, which at press time represented a return of 157 per cent.
Also cited in the update was Shopify, on which Papageorgiou and Kwan maintained their “Buy” rating and $1540.00 target, which at press time represented a return of 16.8 per cent, and endpoint security company Absolute Software (Absolute Software Stock Quote, Chart, News TSX:ABT), on which the analysts maintained a “Buy” rating and $20.00 target, which at press time represented a projected return of 29.4 per cent.
In the report, Papageorgiou and Kwan also recommended Kinaxis (Kinaxis Stock Quote, Chart, News TSX:KXS), ProntoForms (ProntoForms Stock Quote, Chart, News TSXV:PFM) and Quorum Information Technologies (Quorum Information Technologies Stock Quote, Chart, News TSXV:QIS).