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Sabio is a compelling investment opportunity, says Paradigm

Paradigm Capital analyst Daniel Rosenberg says it’s full speed ahead for Sabio (Sabio Holdings Stock Quote, Charts, News, Analysts, Financials TSXV:SBIO), the demand-side marketing platform which began trading on the TSX Venture Exchange last fall. Sabio should have sustained rapid growth, according to Rosenberg, who updated clients on the company in a Tuesday report where he reiterated his “Buy” rating on the stock.

Sabio, which runs its in-house, rich analytics App Science platform providing marketers the ability to plan, buy and execute programmatic ad campaigns, announced first quarter 2022 earnings on Monday. The Q1 featured revenue more than doubling from $2.6 million a year ago to $5.6 million and included a 294 per cent jump in CTV sales to $2.3 million and a 64 per cent increase in mobile sales to $3.3 million. (All figures in US dollars except where noted otherwise.)

“We are pleased with our results for the first quarter of 2022. Sabio continues to execute and take advantage of the significant industry shift towards ad-supported CTV/Streaming,” said founder and CEO Aziz Rahimtoola in a press release. ”Despite the seasonal nature of our industry along with supply shortages and other macro environment issues, we continued our streak of double-digit organic growth, putting us in the strongest financial position in the Company’s history.”

Sabio’s gross profit for the quarter was $3.4 million compared to $1.5 million a year earlier, while adjusted EBITDA was a loss of $0.9 million compared to a loss of $0.5 million for Q1 2021, with management saying the loss was primarily driven by investments in growth initiatives subsequent to the Q1 and costs associated with employees returning to the office. Notably, the company’s deal size grew by 59 per cent year-over-year during the quarter to $64,000 and was led by larger CTV campaigns.

Looking at the Q1 results, Rosenberg said they were above expectations on revenue, with the $5.6 million beating the analyst’s $5.2 million estimate, while the adjusted EBITDA loss of $0.9 million was greater than Rosenberg’s call at negative $0.5 million but slightly better than the consensus forecast at negative $1.1 million.

Rosenberg figures Sabio ended the quarter with cash of about $2.75 million and $5.2 million in debt, noting the company’s renegotiated credit facility at $7.0 million from $4.0 million, which the analyst said gives additional flexibility to Sabio’s balance sheet.

“SBIO has hired an M&A advisor and is looking at small tuck-in acquisitions focusing on App Science. The balance sheet has room to support operations; however, large M&A would likely require additional funding,” Rosenberg wrote.

“We continue to see deals in the ad tech space focusing on ad measurement and attribution. In April, iSpot TV, an ad measurement firm, raised $325 million from Goldman Sachs which values the company at ~$1 billion (10x EV/Revenue multiple), he said.

Rosenberg said Sabio is on track to deliver positive adjusted EBITDA by the end of 2022 and noted how the company’s KPIs continue to trend well, with its average deal size increasing.

“Sabio has built a comprehensive technology portfolio and is trusted by some of the world’s leading brands and agencies. The industry has substantial tailwinds including shifting viewer habits that are supportive of continued rapid growth. Sabio is in the early stages of commercializing its analytics platform, App Science. In addition to rapid organic growth, we see meaningful optionality to monetize App Science in the attractive TV analytics market, estimated to be a $1.9 billion opportunity,” he said.

Having revised his estimates, Rosenberg is now calling for Sabio to hit $35.1 million in revenue for 2022 (previously $34.8 million) and adjusted EBITDA of $1.6 million (previously $2.2 million). For 2023, he is calling for $43.9 million in revenue (previously the same) and $3.6 million in EBITDA (previously $3.7 million).

On valuation, Rosenberg is using a 4.5x EV/Net Revenue multiple on his 2023 forecast to arrive at a maintained C$3.25 target price, which at the time of publication represented a projected one-year return of 261 per cent.

The analyst has Sabio currently trading at 1.6x 2023 EV/Net Revenue, which compares to the industry average of AdTech players at 3.7x. 

“Sabio’s growth trajectory looks attractive and can be seen when normalizing seasonality on a trailing 12-month basis. The company’s differentiated insights around CTV are seeing significant traction with blue-chip customers. We find it notable for a small AdTech company to have established an enterprise customer base, and who are increasingly spending with the company,” Rosenberg wrote. 

“Combined with Sabio’s differentiated technology and valuable services, we believe there is a compelling investment opportunity at current levels in a very attractive space — CTV. We reiterate our Buy recommendation,” he said.

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

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