Stephen Boland of Raymond James is quick to tout the merits of investor relations platform company Q4 Inc (Q4 Inc Stock Quote, Charts, News, Analysts, Financials TSX:QFOR), initiating coverage on February 4 with an “Outperform” rating and a target price of $14.50/share, projecting a one-year return of 147.9 per cent.
Based in Toronto, Q4 Inc provides a comprehensive cloud-based capital markets communication platform for corporate clients, investors and investment banks in Canada and internationally. Q4 has four distinct component offerings: Web services, which currently accounts for 48 per cent of the company’s revenue mix, Virtual Events at 36 per cent, Analytics at nine per cent of revenue and CRM accounting for the remaining seven per cent.
Q4 completed an initial public offering at the end of October, raising net proceeds of $90 million (US$71 million) at $12/share, with the intent of using US$50 million towards organic and inorganic growth initiatives after clearing debt. The company also has access to a US$25 million revolving debt facility.
Q4 has built up a significant logo portfolio, executing on partnerships with a full 50 per cent of the S&P 500, 63 per cent of the DOW 30 and 48 per cent of the Russell 1000 constituents. However, Boland said despite the recognition Q4 still has a significant addressable market, as its corporate companies represent just six per cent of global public companies.
In Boland’s view, Q4 offers one of the most complete investor relation products in its industry, applauding the platform’s ‘direct-to-investor’ approach.
“Many competitors offer single-point solutions which fail to address the increasingly interconnected nature of the capital markets,” Boland said. “On top of the company’s core investor relations offering, QFOR’s more advanced CRM and Analytics solutions provide alternative communication channels for corporates to liaise directly with both current and potential investors.”
According to Boland, approximately 80 per cent of the company’s third quarter revenue was recurring, illustrating a premium and comprehensive product with high costs of switching.
Going forward, acquisitions figure to be a key part of Q4’s growth strategy, with the company identifying 14 active targets and four in the NDA stage and another potential acquisition in the pre-LOI stage. With the IPO now complete, Boland believes at least one acquisition will be completed in the first half of 2022.
The company has been busy on the executive front recently, beginning the year by appointing Julie Silcock, senior advisor at CDX Advisors with over 35 years of experience with M&A and capital markets, to its board of directors.
“As a strategic growth capital and M&A advisor with deep expertise in capital markets transactions, I have an intrinsic understanding of, and appreciation for the value Q4 delivers to its clients through its world class technology and services,” Silcock said in a January 19 press release. “Now more than ever, all participants across the capital markets need clear investor communication and the ability to discover and engage with each other in a virtual environment. I look forward to working with this highly talented team and contributing to the growth and success of Q4.”
With Q4 set to release its fourth quarter financial results on March 2, Boland believes QFOR, along with other smaller-cap, earlier-stage companies, has been disproportionately impacted by recent contractions in the tech and software space in the last few months.
“We believe the changing rate environment has tilted investor focus towards companies with a more favourable short-term outlook and away from those who have invested more heavily in their long-term growth,” Boland said. “We believe this dislocation has created an attractive entry point for stocks like QFOR that lack near-term profitability but are well-positioned to deliver stronger margin expansion in the future.”
Boland sees solid financial growth for Q4 in his initial analysis of the company, forecasting $71 million in revenue for 2022 for an implied year-over-year increase of 29.1 per cent on his 2021 estimation of $55 million. Looking ahead to 2023, Boland estimates another significant jump to $96 million, suggesting a year-over-year increase of 35.2 per cent.
Accordingly, Boland’s EV/Revenue multiple projections drop on a similar trajectory, as he forecasts a dip from 2.4x in 2021 to a projected 1.9x in 2022, then to 1.4x in 2023 ahead of becoming profitable in 2024.
Meanwhile, Boland also forecasts a widening gross margin for the company, estimating a jump from $31 million and a 56.4 per cent margin in 2021 to a projected $45 million and a 63.7 per cent margin in 2022, then hitting another milestone in 2023 at $68 million, good for a 70.6 per cent margin. On adjusted EBITDA, the analyst has estimated a $16 million loss for 2021, a $24 million loss in 2022 and then a $14 million loss in 2023.
Boland has based his $14.50 target on an EV/Revenue multiple of 4.5x his 2023 estimates, saying, “This multiple is at a material discount to a blend of Canadian SaaS, CRM solution offerings, website design platforms, and capital markets technology providers. We believe this is justified given QFOR’s current lower margin profile. However, at the current valuation of under 2.0x we believe this stock is materially oversold.”
Disclosure: Q4 Inc is an annual sponsor of Cantech Letter.
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