Buy Coveo Solutions stock on pullbacks, says National Bank

It’s been a nice ride in recent months for AI software platform Coveo Solutions (Coveo Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CVO), with the stock up by about half since early November. But with tailwinds aplenty and strong fundamentals, investors can expect further upside from Coveo, according to National Bank Financial analyst Richard Tse, who reiterated a “Buy” rating on the stock in a Monday update to clients.

Coveo is a relevance platform, meaning it uses AI to provide search, recommendations and personalization solutions for digital experiences. The company reported third quarter fiscal 2023 financials on Monday for the period ended December 31, 2022, showing revenue up 23 per cent year-over-year to $28.5 million and adjusted operating income of negative $3.9 million. The company ended the quarter with cash and equivalents of $207.6 million. (All figures in US dollars except where noted otherwise.)

Management guided for fiscal fourth quarter revenue between $28.6 and $29.1 million and an adjusted operating loss between $5.0 and $6.0 million. 

“The trend of large enterprises investing in AI-powered customer experience platforms to drive business optimization – an imperative – continues. We had a number of significant transactions in the quarter and continued to see demand for our solutions across all lines of business, which we believe bodes well for our future growth prospects,” said Chairman and CEO Louis Têtu in a press release.

Looking at the results, Tse called them in-line to better-than-expected, with the $28.5 million topline coming in a little ahead of his call at $28.1 million as well as the consensus forecast at $28.0 million. The adjusted operating loss of $3.9 million was also better than National Bank’s forecast at negative $5.5 million and the Street’s negative $5.6 million.

Tse said one of the key takeaways from the quarterly results was Coveo’s solid gains in SaaS Subscription revenue in a tough macro environment. The company’s SaaS revenue was $26.4 million, up 25 per cent year-over-year, with most of that growth being organic in nature. Tse said Coveo’s strong performance was driven in part by its new customer wins, while a steady stream of expansion orders underscores the company’s ability to drive a healthy return on investment for its customers.

“Bottom line, we continue to like Coveo for its strong underlying fundamentals, competitive positioning in an industry (AI) that’s undergoing a structural market tailwind that’s enhanced by a powerful ecosystem that includes native integrations with some of the most pervasive and prolific enterprise application players in the market,” Tse wrote.

“We like this name and would look to opportunistically wade in, particularly on market pullbacks,” he said.

With his “Buy” rating, Tse reiterated a C$11.00 target price, which at the time of publication represented a projected one-year return of 19.6 per cent.