Buy kneat.com on the dip, says Eight Capital

Shares of kneat.com (kneat.com Stock Quote, Charts, News, Analysts, Financials TSX:KSI) had been popping over the last couple of weeks before a recent quarterly earnings release prompted a dip. Consider it a nice opportunity to pick up the stock, according to Eight Capital analyst Christian Sgro, who maintained a “Buy” rating in a Thursday report to clients.

Kneat is a SaaS-based platform for digitizing paper-based processes for regulated industries including the life sciences. The company announced its second quarter 2023 financials on Tuesday, showing revenue up 45 per cent year-over-year to $8.0 million and an adjusted EBITDA loss of $1.3 million compared to a loss of $0.7 million a year earlier.

Kneat had a few nice wins over the quarter, having picked up new Master Service Agreements with a number of large pharmaceutical companies.

“With a record number of strategic wins in the first half of 2023, we are fortifying our revenue base for the next several years. We expect to see strong topline growth over the balance of the year, as we continue to grow into the investments we made over the course of 2022,” said CEO Eddie Ryan in a press release.

Sgro said the $8.0 topline was under his estimate at $8.5 million as well as the consensus call at $8.4 million; meanwhile, the adjusted EBITDA loss of $1.3 million was also a hair heavier than Sgro’s forecast at negative $1.1 million and the Street at negative $1.2 million. 

But Sgro focused on management commentary in his report, pointing out that kneat has materially increased its estimated total addressable market (TAM) from US$600 million to US$2 billion, with the upgrade now including a larger set of regulated end markets in health care, chemicals and supply chain along with further global opportunities.

“The key growth driver for Kneat remains expansions among Tier 1 customers, which we view as resilient despite macroeconomic factors that may affect mid-market traction. We continue to like the partner channel’s business and pro-service support, which will drive margin expansion,” Sgro wrote.

With his “Buy” rating, Sgro maintained a one-year target of $4.50 per share, reflecting at press time a projected return of 47 per cent.

Sgro said the lumpiness inherent to kneat’s business model means that investors will want to take advantage of share price weakness following the quarterly release, with the analyst saying there’s a potential for kneat to outperform in upcoming quarters.

“While we have walked back our revenue estimates, we have confidence in execution driven by ongoing new customer success against a newly redefined TAM of over US$2 billion, from the long-held US$600 million market opportunity,” he said.