Newcomer Coveo Solutions is a buy, says National Bank

National Bank of Canada analyst Richard Tse starting off Coveo Solutions (Coveo Solutions Quote, Chart, News, Analysts, Financials CSX:CVO) with a bang, initiating coverage on the company on Monday with an “Outperform” rating and target price of $18/share.

Founded in Quebec in 2004, Coveo Solutions is a software-as-a-service (SaaS) provider, specializing in artificial intelligence solutions. The company’s cloud-native, multi-tenant Intelligence layer incorporates search, recommendations and personalization solutions. Coveo completed its IPO on November 18 of this past year, issuing about 14.3 million shares at $15 per for gross proceeds of $215.1 million. The company then issued an additional 2.1 million shares for proceeds of about $32.4 million through an over-allotment option.

In his analysis, Tse identifies four key factors about Coveo, beginning with the idea of businesses seeking automatic insight in order to help drive revenue through conversions and upselling, enhancing customer service or providing insight to employees and partners.

“In our view, relevant search has become the norm for many of us today – in fact, it’s likely assumed that something is happening in the background to recommend a product or service – sometimes even before you need/want something,” Tse said.

According to Tse, another factor working in Coveo’s favour is the fact that it’s been in the industry since 2005, growing to become a market leader with over 475 customers.

“While winning new customers is notable to driving growth, expansions with existing customers has been another,” Tse said. “On average, Coveo has been able to double its annualized SaaS contract value after five years. Moreover, we’d note that being able to grow ACV beyond the third year is particularly noteworthy given that churn rates are typically the highest care of average three-year contract terms.”

Tse also pointed to Coveo’s partnerships with high-profile partners like Adobe, AppDirect, Salesforce, SAP and ZenDesk, among others, saying those scale partners provide the company with a target pool of customers.

Finally, Tse said Coveo has a large total addressable market, identifying a conservative estimate of $11 billion in North America alone, part of a global market of approximately $30.7 billion.

“The reality is that much of what Coveo and this market has to offer makes a lot of sense while playing into a theme with real use-case technology,” Tse said.

Most recently, Coveo collaborated with RSR Research to provide insight into what ecommerce success will look like for retailers in 2022, entitled Winning at Customer Acquisition in the Digital Shopping Age.

In the report, 83 per cent of respondents named their most important priority as acquiring new site traffic, significantly more so than driving more onsite conversions, which came in at 59 per cent. Meanwhile, 57 per cent of respondents indicated the majority of their shoppers begin their experience on Google or Amazon, with 83 per cent increasing their interactions with Amazon over the last 12 months.

However, the biggest headline from the report was that 98 per cent of respondents indicated they are currently using or planning to use AI and machine learning in the next 18 months.

“Opportunity starts once shoppers land on a retailer’s digital property,” said Brian McGlynn, GM of Commerce at Coveo in the company’s January 26 press release. “Retailers should be asking themselves how they are going to meet customer expectations in a personalized and relevant way. The only way to provide a hyper-personalized, relevant experience at scale is with AI.”

Tse projects modest growth for Coveo over the next few years, with revenue going from $64.9 million in 2021  to a forecast of $83 million in 2022, implying year-over-year growth of 27.9 per cent. Tse then projects Coveo moving into nine figures in 2023 at a forecast of $108.1 million for a projected year-over-year increase of 30.2 per cent, then growing again to $136.3 million in 2024, implying a year-over-year increase of 26.1 per cent. (All report figures in US dollars.)

Accordingly, Tse expects the company’s EV/Sales multiple to drop with growing revenue, forecasting a drop from 9x in 2021 to 7.1x in 2022, then dipping again to 5.4x in 2023 before falling further to 4.3x in 2024.

Tse also sees the company maintaining a high gross margin ranging from 75 per cent in 2021 to 77 per cent in 2024, while he projects the company’s EBITDA margin remaining negative through the entire forecasting period, with its low point being -32 per cent in 2023.

Tse forecasts the company to have a positive book value per share beginning in 2022 at $2.47/share, though that number drops to a projected $1.56/share in 2024. Tse has an accompanying P/BVPS multiple increasing from 3x in 2022 to a projected 3.9x in 2023, then up to a projected 4.7x in 2024.

Coveo’s stock price has dropped by about 38 per cent since it began trading on the CSE in November, hitting a low of $9.30/share on January 28. At press time, Tse’s $18.00 target represented a projected one-year return of 95.3 per cent.