Eight Capital launches on Coveo with a Buy rating

Investors looking for a Canadian entry into the artificial intelligence (AI) investment theme should be thinking about Coveo Solutions (Coveo Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CVO). That’s from Eight Capital analyst Adhir Kadve, who initiated coverage on the stock on Thursday with a “Buy” rating and C$12.00 target price, which at press time reflected a one-year return of 67 per cent.

Coveo is a global provider of business solutions for e-commerce, customer service, website and workplace applications and operates the AI-powered Relevance Cloud Platform. Founded in 2004 and headquartered in Québec City, Coveo’s platform takes in massive amounts of data from internal and external sources and incorporates clickstream data and behavioural patterns and, using its internally-developed AI and machine learning models, helps users complete searches.

The company has business in Services, where enterprise clients are aided in self-service customer functions, while its Commerce solutions help e-commerce merchants personalize shopping experiences for customers. Coveo also has a Website segment to improve website functionality and Workplace solutions for employee intranets.

Kadve said Coveo is a market leader in Enterprise Search and Recommendation, with an end-to-end solution with a unique status among both larger platform organizations and smaller competitors. 

As well, Kadve says Coveo is well-positioned to capitalize on the massive AI tailwinds and interest, where the use of AI in the corporate tech stack has been increasing in recent years. He quoted a McKinsey report that said AI investment will significantly increase over the coming three years, where more and more organizations are viewing AI as critical to their forward plans.

“Though the company is currently seeing sales cycles lengthen primarily due to macro factors and expected churn from the Qubit acquisition, we see these headwinds as largely transient. Over the mid-to-long term, we believe that as Enterprises look to harness AI technologies (both Generative AI and others) to drive efficiency and profitability, this should result in higher AI- related budget spending, and Coveo should be a net beneficiary,” Kadve wrote.

“Further, the ongoing growth of the Commerce LoB, bolstered by the SAP-endorsed partnership, should support a re-acceleration of SaaS growth in FY25. Finally, we believe that the pivot to profitability is a potential key re-rate opportunity for shares. Based on this, we see a strong setup for Coveo moving forward,” he said.

By the numbers, Kadve sees Coveo’s revenue going from $112.0 million in fiscal 2023 (year end March 31) to $128.0 million in fiscal 2024 and to $153.2 million in fiscal 2025. He is forecasting adjusted operating income to go from negative $20.2 million in fiscal 2023 to negative $14.0 million in fiscal 2024 and to negative $4.4 million in fiscal 2025. (All figures in US dollars except where noted otherwise.)