D2L keeps Buy rating with Eight Capital

Eight Capital analyst Christian Sgro is staying bullish on cloud-based learning management company D2L Inc (D2L Stock Quote, Charts, News, Analysts, Financials TSX:DTOL) after the company’s latest quarterly results. In a client update on Wednesday, Sgro maintained a “Buy” rating and C$11.00 target price, saying the stock is attractively valued compared to its peers.

Shares of D2L dropped ten per cent in trading on Wednesday after the company released on Tuesday after market close its fourth quarter fiscal 2023 financials for the period ended January 31, 2023. The company posted quarterly revenue up three per cent year-over-year to $42.7 million, while the full-year topline was up 11 per cent to $168.4 million. Q4 adjusted EBITDA was positive $0.4 million compared to a loss of $3.9 million a year earlier. (All figures in US dollars except where noted otherwise.)

“The long-term demand outlook remains robust as organizations across all our markets look to replace legacy technology and experiences with a flexible, modern learning platform,” said CEO John Baker in a press release.

Sgro reported that D2L’s Q4 revenue of $42.7 million compared to his forecast at $43.3 million and the consensus estimate at $43.2 million, while the $0.4 million in adjusted EBITDA compared to Sgro’s call at negative $0.8 million and the Street at negative $1.5 million.

At the same time, Sgro said management guidance with the quarterly commentary was cause for a re-assessment of near-term estimates. Management said soft booking growth in its fiscal 2023 means a gradual build over the first half of fiscal 2024 followed by accelerated growth over the second half of the year.

D2L management guided for fiscal 2024 total revenue between $180 and $182 million, implying growth of seven to eight per cent and for fiscal 2024 adjusted EBITDA to land between $4 and $6 million. For his part, Sgro had been modelling fiscal 2024 revenue at $187.5 million and EBITDA at $6.0 million.

But even with the near-term re-jig, Sgro said there is no change to his medium-term expectations. 

“With the view that F2024 guidance is achievable, we continue to model our F2025 estimates just short of the medium term model leaving upside to execution. Qualitatively, we see D2L’s market leadership and investment in product and sales as key drivers of growth acceleration. We continue to like the defensive nature of the model, profit potential, and attractive valuation relative to software and academic peers,” Sgro wrote.

Sgro is forecasting full fiscal 2024 revenue and adjusted EBITDA of $180.4 million and $6.0 million, respectively, and moving to fiscal 2025 revenue and adjusted EBITDA of $204.4 million and $22.4 million, respectively. 

Sgro estimated D2L to be currently trading at 9.0x calendar 2024 EV/adjusted EBITDA compared to its key academic learning peers at 18.2x. At press time, Sgro’s C$11.00 target represented a projected one-year return of 38.9 per cent.