Sabio scores a target raise from Paradigm Capital

Better than expected quarterly results have Daniel Rosenberg of Paradigm Capital more confident about Sabio (Sabio Holdings Stock Quote, Chart, News, Analysts, Financials TSXV:SBIO), raising his target price from C$3.00/share to C$3.25/share while maintaining a “Buy” rating in an update to clients on Wednesday.

Founded in 2015, Encino, California-based Sabio provides digital advertising campaigns and services as well as rich analytics for brand marketers and agencies. Sabio has a particular focus on the Connected TV (CTV) market, which is part of the overall shift in the advertising industry toward digital distribution, with digital ad spending in the United States reaching $191.1 billion in 2021.

Rosenberg’s updated analysis comes after Sabio released preliminary results for its fourth quarter.

“The outlook for 2022 is positive with management confident in sustaining continued momentum,” Rosenberg said. “We recognize Sabio as a leader in CTV, which is having spill-over effects, driving growth in analytics and mobile as well.”

In the preliminary results, Sabio projects revenue between $9.6 and $10.4 million for its quarter (all figures are in US dollars except where noted otherwise), resulting in 77 per cent year-over-year growth while also being above the consensus estimate of $9.2 million in revenue.

Thanks to increased adoption from high-profile companies, Sabio’s Connected TV revenue stream is projected to experience ninefold growth from 2020 to 2021, and in December, CTV revenue surpassed mobile sales revenue for the first time in the company’s history.

“Fortune 500 U.S. brands are increasingly relying on Sabio’s proprietary streaming TV, and mobile DSP along with its AppScience analytics platforms to effectively and efficiently reach cable cutting consumers in the United States,” said Aziz Rahimtoola, Chief Executive Officer of Sabio in the company’s January 25 press release. “Sabio’s full year results benefited from the unique positioning of our mobile data powered CTV advertisement platform. We believe growth in our CTV revenues is only in the early innings, and based on industry research*, pacing well ahead of the high growth of the overall CTV market.”

Sabio is a beneficiary of an industry undergoing a significant change in how money is allocated, with more ad spenders choosing Connected TV over linear programming to the tune of $13.4 billion in investment in 2021, with an expectation of growth to $27.5 billion by 2025.

The company has also continued investing in itself, as it has focused capital on developing its analytics capabilities and investing in its salesforce. In particular, having a focus on growing its presence in the New York has resulted in the region achieving the fastest growth within its operations.

The preliminary financial reports have prompted Rosenberg to revise some of his financial projections, increasing his revenue estimate for 2021 from $21.5 million to $23.6 million for an implied year-over-year increase of 78.8 per cent and a beat on the consensus projection of $21.8 million. Looking ahead to 2022, Rosenberg has raised his revenue target from $28.5 million to $31.5 million to imply a year-over-year increase of 33.5 per cent, along with outpacing the consensus estimate of $29.3 million.

Rosenberg also raised his expectations for the company’s gross profit and margin in the same timeframe, increasing his 2021 estimate from $13.1 million to $14.4 million for an implied margin of 61.1 per cent, while the 2022 estimate grew from $17.1 million to $18.9 million for an implied margin of 60 per cent.

The adjusted EBITDA projections remained relatively steady, with Rosenberg raising his 2021 estimate from $1 million to $1.1 million (implied margin of 4.7 per cent), with the 2022 estimate remaining at the same point for a margin of 3.5 per cent.

From a valuation perspective, Sabio comes in ahead of its peer group in terms of EV/Revenue multiple estimates at 2.9x in 2021 and 2.2x in 2022 (peer group averages 7.5x in 2021 and 5.8x in 2022), though it lags behind in EV/EBITDA estimates at 37.3x in 2021 and 37x in 2022, compared to the peer group average projections of 26.9x in 2021 and 21.4x in 2022. 

“Sabio is growing rapidly and its differentiated insights around CTV are seeing significant traction with blue chip customers,” Rosenberg said. “We believe commercialization of App Science, along with double-digit growth and strong SaaS margin potential, make Sabio a compelling investment opportunity in a very attractive space.”

Since it began trading on the TSX Venture Exchange on November 26, Sabio’s stock price has dropped by 24.7 per cent, and 17.4 per cent in the month of January alone. Rosenberg’s new C$3.25 target implied at press time a one-year return of 160 per cent.

Disclosure: Sabio Holdings is an annual sponsor of Cantech Letter.