Thinkific is running the Shopify playbook, says National Bank

Newly IPO’d Thinkific Labs (Thinkific Labs Stock Quote, Chart, News, Analysts, Financials TSX:THNC) received a coverage initiation from National Bank Financial analyst Richard Tse on Thursday, who initiated coverage of the stock with an “Outperform” rating and C$20.00 target.

Vancouver-based Thinkific is a online technology platform for course creators, which gives creators the ability to build, market, sell and deliver their products while requiring no specialized technical expertise. The company’s clients currently cover 165 countries worldwide with Thinkific’s revenue coming from recurring subscription services.

For its IPO, the company closed on a C$160-million offering and started trading on the TSX on April 27, starting out of the gate with a market value of C$1.25 billion. So far, the stock is up about 20 per cent.

Thinkific looks to give online course creators — anyone from hobbyists and coaches to trainers and professionals —a place to set up shop and, in CEO Greg Smith’s words, “democratize education” in the age of “knowledge entrepreneurship.”

Speaking on the company’s IPO, Smith said in a press release, “We will be investing even more in research and development to help businesses build, grow and diversify through courses. Becoming a public company is an exciting and important milestone, but our journey is just beginning. Today we’re helping more than 50,000 active course creators — and in the future, we can help millions. We are just getting started.”

For his part, Tse said there are three main reasons why he likes Thinkific, arguing the company is uniquely positioned for outsized growth, that it has a large and growing addressable market in front of it and it’s set up for incremental growth through offering a range of new services for its customers.

Setting the stage, Tse described how Thinkific is set apart from the landscape of competitors. There are: (1) SaaS platforms that offer the tools for creators to create and manage their own content such as Kajabi and Teachable; (2) course marketplaces like Coursera and Pluralsight which control the content and branding for the creator; (3) social media platforms like YouTube and Facebook that offer a broad reach but limited capabilities; and there are (4) learning management systems providers like Docebo who provide platforms for large enterprise clients.

Tse says of the four the direct comparison for Thinkific is other SaaS platforms, but Tse believes the company has one of the broadest set of offerings on the market.

“In many ways, [Thinkific’s] business model is not dissimilar to Shopify Inc,” Tse wrote. “While Shopify largely enables SMBs (small and medium businesses) to sell products (and sometimes services), Thinkific offers the same for Course Creators looking to monetize their knowledge with the most notable example being the ability to offer online courses.”

“But while the current focus may be on those independent content creators, Thinkific’s platform is scalable; offering it the potential to move into a larger (‘enterprise’) in the future. Finally (and sticking with the Shopify perspective), as a matter of comparison – as to what Amazon means to Shopify in terms of competition, YouTube and Instagram are to Thinkific,” Tse said.

As to Thinkific’s addressable market, Tse looked at the number of SMBs in the US focused on service verticals where course creation would be applicable and aplied those findings across further regions in the UK, Europe, Australia, New Zealand and Canada, coming up with an estimated TAM of $13 billion.

On its incremental growth potential, Tse again pointed to Shopify, saying Thinkific’s App Store (launched on May 4) will give course creators further tools to run and scale their businesses, while over the shorter-term, Tse sees Payments as the next natural service offering that will enable Thinkific to monetize a greater portion of the gross merchandise volume carried on across its platform.

By the numbers, Thinkific generated in 2019 revenue and adjusted EBITDA of $9.8 million and $803,000, respectively, and in 2020 revenue and adjusted EBITDA of $21.1 million negative $388,000, respectively. (All figures in US dollars except where noted otherwise.)

The company delivered its first quarter 2021 financials earlier in May, showing $8.3 million in revenue compared to $3.3 million a year earlier and an adjusted EBITDA loss of $0.5 million compared to a loss of $0.1 million a year earlier.

Tse thinks Thinkific will generate 2021 and 2022 revenue of $37.9 million and $68.6 million, respectively, and 2021 and 2022 adjusted EBITDA of negative $16.0 million and negative $23.2 million, respectively. Tse’s C$20.00 target represented at the time of publication a projected one-year return of 25.0 per cent.

“Following a successful IPO with C$184 million in gross proceeds, we see Thinkific having ample cash / liquidity to execute its growth plan based on our financial forecast estimates,” Tse wrote.

“While we do not expect the Company to be cash flow positive within our forecasting period (F2023), the fact that Thinkific has been historically generated positive cash suggests the drag in profitability/cash flow is largely due to investments into products, sales and marketing and brand awareness,” he said.