VerticalScope has a big upside, says Eight Capital

Investment bankers Eight Capital launched coverage on Tuesday on Canadian digital media company VerticalScope (VerticalScope Stock Quote, Charts, News, Analysts, Financials TSX:FORA), with a “Buy” rating and C$20.00 target price. Eight Capital analyst Adhir Kadve said VerticalScope is in a strong position to monetize users on its portfolio of 1,200 online message boards.

Toronto-based VerticalScope, which went public by IPO in June, 2021, has carved out its space through over 230 acquisitions, building out a portfolio of over 1,200 Internet-based communities with over 110 million monthly active users (MAUs) and 60 million registered users. Its platform carries message boards on commercial topics such as Automotive, DIY, Electronics, Fitness and Outdoors, with content crated by knowledgeable enthusiasts and consumed by users who discover the online communities through search queries, often in regards to researching a product. 

Kadve said the proximity to purchases gives VerticalScope a great opportunity to monetize its users, for example, by showing them contextually relevant advertising or through e-commerce sales where VerticalScope directs users to key partner websites.

“VerticalScope has been a serial acquirer of communities for the better part of its history, having completed +230 acquisitions. F21 saw the company return to growth (+16 per cent year-over-year), after two years, as the company paused acquisitions and intentionally reduced advertising on its revenue in F19 to focus on development and launch of the Fora platform, and in F20 which saw the onset of the COVID-19 pandemic and thus a pullback in ad spending,” Kadve wrote in his coverage initiation. 

“We expect that VerticalScope will continue to show growth via both inorganic and organic means. From a margin perspective, VerticalScope’s asset light model allows it to generate strong ~40 per cent margins, which we expect will only grow higher as VerticalScope continues to scale,” he said.

Kadve said the online forums and message board space serves as an alternative medium to traditional social media for brands and advertisers, quoting statistics saying that over 850 million users worldwide, or 17.2 per cent of the 4.95 billion internet users globally, use forums and message boards to research brands prior to buying a product or service. Further, he pointed to a study showing that a greater percentage of users trusted content on online communities over social media websites, especially GenZ users for whom 48 per cent trusted online communities compared to 36 per cent trusting social media.

Moreover, with its portfolio of assets, Kadve said VerticalScope has a dominant position in the forum/message board space.

“Key competitors to VerticalScope’s communities are Reddit and Facebook Groups. But when compared to Reddit, VerticalScope’s communities have much higher engagement,” Kadve wrote. “This engagement is driven by the niche and topic-focused nature of these communities, which attract a specific type of user: those who contribute information and those who consume information.”

“When combined, a highly engaged audience, product-centric discussions, and contextually relevant advertising, we believe there is a compelling case made to advertisers, thus ultimately driving strong CPMs,” he said.

With a current market capitalization of C$182 million, VerticalScope has 24.3 million shares outstanding. The stock went initially higher after the IPO last summer but began falling as of late September last year. FORA is now down about 73 per cent over the past 12 months and down the same for the year-to-date. 

But Kadve sees better days ahead for FORA, with his C$20.00 target representing at the time of his report’s publication a projected one-year return of 167 per cent.

On the financials, Kadve is forecasting VerticalScope’s revenue to go from $65.8 million in 2021 to $86.2 million in 2022 and on to $95.6 million in 2023. On adjusted EBITDA, he is calling for 2021’s $29.0 million to move to $34.4 million in 2022 and then to $38.7 million for 2023. (All figures in US dollars except where noted otherwise.)

On valuation, Kadve has FORA at an EV/Sales of 3.3x for 2021’s figures, 2.5x for 2022 and 2.2x for 2023. On EV/EBITDA, he has 7.4x for 2021, 6.2x for 2022 and 5.5x for 2023.

“VerticalScope currently trades at 5.5x F23E EV/EBITDA, a significant discount to a peer group of Digital Publishers who trade at 9.7x. Our target price is based on 11x F23E EV/EBITDA, a justified premium given VerticalScope’s leading margins,” Kadve said.

VerticalScope announced its second quarter 2022 financials in early August where the company generated adjusted EBITDA up 54 per cent year-over-year to $9.3 million on a topline up 51 per cent to $21.8 million, a record for FORA. Digital Advertising made up $14.2 million of revenue, up 43 per cent year-over-year, while e-commerce sales accounted for $7.6 million and were up 68 per cent year-over-year.

“The power of our business model is proving itself and it’s showing up in our bottom line,” said CEO and Founder Rob Laidlaw in a press release. “Even with the investments we are making in our platform, Adjusted EBITDA was up 51 per cent to $9.3 million in the quarter. Our advertising customers continue to see the incredible value of our intent-based niche audiences and the real business results that our platform can achieve for them.”