National Bank Financial analyst Richard Tse says the dustup between supply chain management company Kinaxis (Kinaxis Stock Quote, Chart, News, Analysts, Financials TSX:KXS) and competitor Blue Yonder isn’t changing his view of KXS. Tse reviewed where things stand in an update to clients on Monday, reaffirming his “Outperform” rating and C$250 target price for Kinaxis, which at the time of publication represented a projected 12-month return of 46.2 per cent.
SaaS supply chain platform company Kinaxis announced on December 14 that a complaint had been filed against it in the US District Court for the northern District of Texas from Scottsdale, Arizona-based Blue Yonder, with Blue Yonder making its announcement of the matter on the same day.
In its statement, Blue Yonder said it has more than 400 patents granted and pending, has spent more than $1 billion on R&D over the past decade and that Kinaxis has used some of its patented inventions in its software.
“This has allowed Kinaxis to circumvent the development process and investment necessary to develop new products,” Blue Yonder said.
In its December 14 notice, Kinaxis said at the time it had received no details on Blue Yonder’s claims but intended to “vigorously defend against the claims.” Now, in a news release on Monday, KXS said it has filed a motion to dismiss the entirety of Blue Yonder’s complaint, saying Blue Yonder’s patents in question are invalid as they “cover well-established concepts in the field of inventory and supply chain management.”
“Those patents simply take generic computer technology and apply it to decades-old concepts like sourcing a bill of materials or allocating manufacturing resources. U.S. law does not allow people to patent ‘computerized shopping lists’ under the U.S. Supreme Court’s 2014 Alice decision,” Kinaxis said.
Kinaxis further has filed a counterclaim against Blue Yonder saying the company has “violated federal and Texas law by misappropriating certain of Kinaxis’ trade secrets and has filed a motion asking the court to force Blue Yonder to return or destroy confidential Kinaxis documents, and to stop using those documents in its case or in competition.”
Kinaxis said the presiding judge has not yet resolved on Kinaxis’ motions but agreed to Kinaxis’ motion to seal the complaint.
Kinaxis CEO John Sicard said in the press release, “Blue Yonder has resorted to litigation to compete where they have otherwise failed. They are using lawyers instead of engineers to play catch-up in the marketplace, where even Blue Yonder acknowledges significant losses to Kinaxis, including several very recent competitions that were in flight at the time of their initial filing. Kinaxis uses our own intellectual property and will not bow to legal threats.”
On the dispute, Tse said it’s now clearly up to the courts to decide an outcome.
“What we will say is that the response by Kinaxis is quite vehement. We can also say that our diligence in recent years has pointed to multiple competitive wins across the landscape of incumbents which corroborates Kinaxis’ assertions,” Tse wrote.
“Bottom line, like the initial claim from Blue Yonder, Kinaxis’ counterclaim does not change our view on the stock. We continue to believe KXS’ valuation does not fully value a ‘normalized’ financial run-rate looking ahead, particularly, given what we estimate to be a market share of less than five per cent,” he said.
Kinaxis’ share price was a big mover in 2020, as the market put faith in the company’s platform during COVID-19, taking the stock from C$100 per share at the start of the year to as high as C$220 by early August. KXS has fallen back since then to where it is presently in the C$170-$180 range.
But Tse thinks there’s upside in 2021 for the stock, saying in an early January report that KXS was one of his best bets due to the way COVID has underscored the importance to businesses of having strong supply chain systems and the fact that Kinaxis has historically been a disciplined allocator of capital.
At the same time, Tse said the longer-term picture might be a little rosier than the short term for KXS.
“We believe the inability to be on-site reins in some growth short-term. While the Company can proceed with some deployments remotely, we think the current health restrictions will constrain some short-term growth,” Tse wrote in a January 12 report.
Kinaxis last reported earnings in early November where its third quarter 2020 results featured revenue up 17 per cent year-over-year to $55.1 million and adjusted EBITDA down 16 per cent year-over-year to $10.1 million. The company’s SaaS revenue for the quarter rose by 26 per cent to $39.3 million. At the time, Kinaxis guided for full-year 2020 revenue of between $220 and $223 million with an EBITDA margin in the range of 22 to 24 per cent. (All figures in US dollars except where noted otherwise.)
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