After strong quarterly results, Eight Capital analyst Christian Sgro has raised his target on digital marketing company Wishpond Technologies (Wishpond Technologies Stock Quote, Chart, News, Analysts, Financials TSXV:WISH). Sgro reviewed Wishpond in a client update on Friday where he kept his “Buy” rating and lifted his target price from $2/share to $2.50/share for a projected one-year return of 100 per cent.
Founded in 2009 and headquartered in Vancouver, Wishpond Technologies provides an all-in-one suite of integrated digital marketing products focused on serving the small to mid-market. Wishpond released its third quarter financial results on Thursday, showing 90 per cent topline growth for the quarter.
Wishpond hit $4 million in revenue, marking 23 per cent sequential growth and a 90 per cent year-over-year increase, which beat the Eight Capital estimate of $3.6 million and the consensus projection of $3.7 million. Sgro attributed the revenue beat to dissipating headwinds related to foreign exchange along with the company performing as expected.
“We are encouraged to see the company executing on all objectives: achieving positive adjusted EBITDA, scaling S&M, and acquiring complementary technologies which are driving growth,” Sgro said. “Insider buying, and material insider ownership, suggest to us that management is confident in the outlook into Q4 and beyond where we expect momentum to continue.”
The company also reported a gross margin of 69.4 per cent ($2.8 million) in the quarter to beat the Eight Capital estimate of 67.3 per cent ($2.4 million) and the consensus forecast of 67.8 per cent ($2.5 million), though the margin itself is a slight drop from the 72.5 per cent reported in the same quarter of 2020. Adjusted EBITDA was positive at $250,000), beating what both Eight Capital and the consensus had projected to be a small loss, which Sgro noted to be a continuation of the company’s long-held, disciplined strategy of balancing reinvestment and profitability.
Sgro noted that Wishpond has doubled its sales team within its first year of being a public company with the same intention in place for next year, as well as having an active merger and acquisition pipeline, a positive sign after the company showed success in cross-selling its products to customers of PersistIQ and Brax, both of which are recent Wishpond acquisitions.
“The Invigo, PersistIQ and Brax acquisitions have broadened our product portfolio and proven to be accretive to Wishpond’s financial profile,” said Ali Tajskandar, Wishpond’s Chairman and CEO in the company’s November 25 press release. “We are beginning to witness the synergistic benefits of our acquisitions through cross selling the company’s products and services across the different parts of the growing organization. We continue to have a robust pipeline of potential acquisition opportunities and a strong balance sheet with an undrawn credit facility providing the company with ample cash to continue to execute on our inorganic growth strategy.”
Following the updated results, Sgro revised some of his financial projections with immediate effect, as he increased his fourth quarter revenue estimate to $4.4 million from his previous $4.2 million outlook, leading to an increase in the overall 2021 projection to $14.5 million from $13.9 million, resulting in potential year-over-year growth of 84.3 per cent. He has also bumped up his 2022 revenue projection to $21 million from $19.1 million, which would be a year-over-year increase of 44.3 per cent.
Meanwhile, Sgro slightly improved his adjusted EBITDA loss projection to $300,000 for 2021 compared to the initial projection of a $600,000 loss, with an expectation of the company turning positive for adjusted EBITDA in 2022 at $1.1 million (five per cent margin) compared to the previous $1 million estimate.
Sgro has also increased his gross margin projection for 2021 to 67.4 per cent ($9.8 million) from his previous estimate of 66.7 per cent ($9.3 million), while the 2022 projection is now set at 67.3 per cent ($14.1 million) instead of 67 per cent ($12.8 million).
Valuation data also comes into clearer focus for Sgro with the new report, as he projects the company’s EV/Revenue multiple to drop from the reported 7.2x in 2020 to a forecasted 3.9x in 2021, with another drop to 2.7x projected in 2022, which is also when he projects the EV/adjusted EBITDA multiple for the first time at 49.7x.
“On our increased estimates, Wishpond currently trades at 2.7x. With strength in Q3 into the seasonally strong Q4, we are raising our target multiple to 6.0x consistent with our original target at the time of our initiation. With strong insider alignment, estimated 30 per cent organic growth, and 65 per cent gross margin, we believe our target is justified and that M&A will help Wishpond scale into our multiple,” Sgro said.
“Given the company’s calculated FCF breakeven profile, we expect these funds to be allocated to M&A, which will continue to drive inorganic growth and cross-sell across the business,” he said.
Overall, Wishpond’s stock price has fallen by 42.2 per cent for the year to date, hitting a high point of $2.38/share on January 20, though it has rebounded slightly since bottoming out at $1.05/share on August 18.
Disclosure: Wishpond Technologies is an annual sponsor of Cantech Letter.