Echelon Capital Markets analyst Rob Goff believes EQ Inc (EQ Stock Quote, Chart, News, Analysts, Financials TSXV:EQ) is sending the right message, maintaining a “Speculative Buy” rating and target price of $2.40/share for a projected return of 72.7 per cent in an update to clients on Monday.
Founded in 1995 as Cyberplex and headquartered in Toronto, EQ Inc provides digital marketing services using real-time and advanced analytics to help businesses track and optimize their targeted campaigns.
Goff’s updated analysis comes after EQ released its second quarter financial results, which Goff noted to be in line with expectations.
“The continued sequential growth in Data revenues underscores EQ’s platform capabilities as customer engagement continues to see higher recurring revenues and customer wins,” he said. “While advertising continues to see reduced activity in COVID-19 sensitive areas such as travel, EQ also sees supply-side challenges deferring demand in areas such as the automotive sector as an H221 headwind.”
EQ reported $3 million in revenue for the second quarter, a 70.9 per cent quarter-to-quarter increase which fell in line with the consensus estimate of $3 million, along with Goff’s initial projection of $3.1 million. Data revenue accounted for $800,000, marking an 85 per cent year-over-year advance and 66 per cent quarter-to-quarter increase, with the remaining $2.2 million coming from advertising revenue for a 71 per cent year-over-year increase and 73 per cent quarter-to-quarter jump after posting a 21 per cent quarter-to-quarter drop in the first quarter.
Meanwhile, the company reported $1.3 million in gross profits compared to the consensus estimate of $1.4 million and Echelon’s projection of $1.5 million, while EQ reported a negative adjusted EBITDA of $500,000, slightly below the consensus projection of a $200,000 loss and the Echelon estimate of a $300,000 loss.
The company has been busy on the acquisition front, paying $2.5 million on July 5 for Integrated Rewards Inc. and Paymi, a cloud-based marketing platform that uses card linking technology to enable consumers to receive cash back rewards for credit and debit card transactions. EQ plans to integrate the Paymi platform into its LOCUS advertising platform going forward.
“I am very pleased with our progress this quarter and excited about our continued momentum as we push into the second half of the year,” said Geoffrey Rotstein, President and CEO of EQ Works in the company’s August 19 press release.
“The acquisition of Paymi is also an important step forward for EQ and our data strategy. Our focus on zero-party data and providing our clients with unique and impactful insights into their business is enhanced significantly with this acquisition. As companies continue to understand the importance of data and the results we can generate, our proprietary platforms continue to be in demand and the market continues to grow,” Rotstein said.
The company’s financial updates have prompted Goff to revise certain financial metrics. Goff has lowered his revenue projection for 2021 to $14.1 million from the initial $14.8 million projection, though the revised figure would still represent a 35.6 per cent year-over-year increase. Goff has also raised his 2022 revenue projection to $22.5 million from $20.9 million, marking a potential year-over-year growth of 59.6 per cent.
Goff projects a slightly lower gross profit for 2021, lowering his estimate to $6.4 million (45 per cent margin) from $6.9 million (46.5 per cent margin). He also has a slightly lower projection for 2022, reducing his estimate to $10.5 million (46.7 per cent margin) from $10.9 million (51.2 per cent margin).
EQ’s adjusted EBITDA comes in at a negative for Goff in 2021 as he now projects a loss of $1.7 million instead of his initial estimate of an $810,000 loss, though he projects a turnaround in 2022 with a forecasted adjusted EBITDA of $417,000, which comes in below his initial $872,000 estimate.
Goff’s valuation data also appears to support EQ’s attractiveness, with Goff lowering the EV/Revenue multiple projection from 8x in 2020 to 5.9x in 2021 compared to the target of 10.8x and peer estimates of 19.9x, with a further reduction to 3.7x projected for 2022 compared to the target of 6.8x and peer estimates of 11.7x.
Goff also projects the company’s EV/Gross Profit multiple to decrease, lowering the multiple from 17.7x in 2020 to a projected 13.2x in 2021 compared to the target of 23.9x and peer estimates of 25.6x, followed by another projected drop to 8x for 2022 compared to the target of 14.5x and peer estimates of 16.7x.
Overall, Goff believes EQ is well-positioned to continue its growth moving forward.
“We continue to look for sustained outperformance around aggressive organic growth where the data capabilities are the core driver,” he said. “We look for EQ to acquire within the ad-tech and data analytics space adding complementary technology, talent, and distribution channels. Gaining scale together with US traction remain priorities.”
EQ Inc closed Thursday trading at $1.40/share on the TSX Venture Exchange, unchanged from its Wednesday close. Overall, EQ Inc’s stock price has dropped 15.2 per cent for the year to date, reaching a high point of $1.88/share on February 8.
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