Buy Pivotree for eCommerce exposure, says Paradigm Capital

Freshly IPO’d Pivotree (Pivotree Stock Quote, Chart, News TSXV:PVT) received a coverage launch from Paradigm Capital’s Daniel Rosenberg on Friday, with the analyst saying the end-to-end eCommerce solutions provider is being buoyed by sectoral tailwinds.

But the company’s unique business model is what sets it apart from the competition and keeps enterprise customers coming back for more, the analyst said.

Toronto-based Pivotree is an end to end multi-service technology provider for medium and large enterprises, where, as opposed to selling particular products to a wide range of clients, Pivotree focuses on custom applications suiting its enterprise clients’ needs and enabling what it calls ‘frictionless commerce.’

The company debuted on the TSX Venture on October 30, completing an initial public offering of about 8.1 million shares at $8.50 per for gross proceeds of about $69 million, including over-allotment of about one million shares. The company plans to use the money to fund M&A activity, while the stock is currently trading in the $11.00 range.

With annual recurring revenue of about $49 million and a raft of long-standing customers with multi-year contracts, Rosenberg said Pivotree not only provides strong visibility on future revenue but is a good bet for inorganic growth in the growing secular trend in e-commerce.

“We believe Pivotree can continue to drive meaningful organic growth (20-per-cent plus) and has the potential to accelerate expansion through M&A activity,” Rosenberg wrote. “Pivotree’s recent $69-million IPO leaves the company well funded to pursue acquisitions. Secular changes accelerated by the pandemic are strong tailwinds supporting its strategy to act as a multi-service technology provider for large enterprise customers seeking to transform their digital capabilities. The value of its solutions to customers is apparent through a strong gross margin profile (50 per cent plus).”

“Pivotree serves some of the largest retailers, branded manufacturers, and wholesalers in North America. The top 1,000 retail, branded manufacturers, wholesalers and distributors (RMWD) (excluding Amazon and Walmart) represent ~$3.5 trillion in retail sales and digital channels only represent 11 per cent of total revenue, with expectations that the channel will increase to 19 per cent by 2024. Pivotree is serving a market that is rapidly expanding in size. Today, Pivotree helps power brands totalling over $35 billion in gross merchant value or about one per cent of its addressable market,” Rosenberg said.

The analyst said there’s an increased need for enterprises to complete their digital transformations, pointing to Gartner’s latest IT spending forecast which showed all segments growing in 2021 after a slowdown in 2020. Gartner expects worldwide IT services to grow by four per cent in 2021 but sees the enterprise software category to have the highest growth at 7.2 per cent.

And Rosenberg thinks what Pivotree offers sets it apart from the competition, arguing that while there are many vendors of eCommerce solutions, most target smaller businesses and operate on a high-volume model that fits for markets requiring a low degree of customization. Instead, Pivotree uses a ‘Customer for Life’ model offering a tailored service and catering to an enterprise’s particular needs.

“Pivotree’s solutions are deeply engrained in their customers’ businesses and are core to operations. The company does not appear to us as an outsourced service provider, but rather a partner that helps companies pursue business outcomes through technology. Our discussions with customers often described Pivotree’s employees as internal team members rather than external consultants. We believe the strong customer relationships will help sustain low customer churn and provide opportunity for long-term contract expansion and renewal,” Rosenberg wrote.

Pivotree reports revenue through two segments, managed services and professional services, both of which have a recurring revenue component. Managed services run primarily on multi-year contracts with its higher-margin revenue currently making up about 60 to 70 per cent of total revenue, according to Rosenberg, who sees margin improvement in managed services going forward.

The company generate revenue and adjusted EBITDA in 2019 of $59.7 million and $5.4 million, respectively, while Rosenberg is calling for revenue and adjusted EBITDA in 2020 of $63.2 million and $5.6 million, respectively, and for 2021 revenue and adjusted EBITDA of $75.7 million and $6.5 million, respectively.

Pivotree last week released its Q3 2020 numbers, coming in with revenue up seven per cent year-over-year to $16.2 million, which was above the consensus call for $15.8 million. Managed Services revenue was up 14 per cent and represented 70 per cent of overall revenue.

Rosenberg called it a positive quarter, with the analyst now estimating Q4 2020 revenue and adjusted EBITDA of $16.2 million and $1.0 million, respectively.

Rosenberg started PVT off with a “Buy” rating and 12-month target of $13.75, which at press time represented a projected return of 25.1 per cent.

The analyst used a blend of EV/Revenue and DCF, with the EV/Revenue valuation coming from a 4.5x multiple of his 2021 estimates of managed services revenue and a 2.5x multiple to professional services revenue. Rosenberg estimates comparables to be trading at a 4.2x multiple.

“Pivotree offers investors exposure to e-commerce trends, with the potential to accelerate growth through M&A,” Rosenberg wrote.