Sabio has a 400% upside, Paradigm says

After quarterly results he describes as “in-line” Paradigm Capital analyst Daniel Rosenberg says there is still a lot of money to be made on Sabio (TSXV:SBIO).

On August 21, Sabio reported its Q2, 2023 results. The company posted Adjusted EBITDA of negative $1.7-million on revenue of (US) $8.0-million, a topline that was up 11 per cent over the same period last year.

“In a testament to the stability and scalability of our sales model, 74% of consolidated revenues in the first half of 2023 were from repeat customers, as we continue to attract and retain customers at high rates, resulting in larger average deal sizes and acquisition-cost efficiencies,” CFO Sajid Premji said. “Moreover, management’s ongoing focus on reducing costs and increasing efficiencies has offset continued investments in our technological capabilities, including a new programmatic offering anticipated to launch in the first half of 2024. Our ability to maintain strong gross margins, combined with the stability in our cost structure, positions Sabio well for Adjusted EBITDA (as defined below) gains in the second half of the year and into 2024. Subsequent to quarter end, we strengthened our cash position with the closure of a non-brokered CAD$1.7 million convertible note offering. Meanwhile, the renewal of our loan facility with Avidbank continues to progress well. Amendments under an executed term sheet include a potential US$3 million increase to the facility, subject to approval from the bank’s loan committee.”

Rosenberg broke down the quarter.

“Sabio reported Q2 results which were in line with expectations,” he said. “The CTV segment continues to grow at an impressive 57%, well ahead of industry bellwethers. On the outlook, management cautioned against economic uncertainties that may contribute to reduced ad budgets and delayed spending from large customers in the near term. However, management was optimistic about higher political advocacy heading into the 2024 U.S. elections, with ad dollars expected to arrive in December. Despite the macro landscape, Sabio lost no customers and continues to win market share with 26% of revenue generated from new logos this quarter. Operating costs are expected to improve sequentially owing to cost optimization efforts. Subsequent to the quarter, Sabio raised C$1.7M in convertible debt and negotiated a renewal of its credit facility that increases its capacity by US$3.0M, leaving it well capitalized to scale into 2024.”

In a research update to clients August 22, Rosenberg maintained his “Buy” rating on Sabio but lowered his price target from $3.50 to $2.75. The new target implied a return of 400 per cent at the time of publication.

Rosenberg thinks Sabio will post EBITDA of negative $1.7-million on revenue of $42.4-million in fiscal 2023. He expects those numbers will improve to EBITDA of $3.1-million on a topline of $56.9-million the following year.

The analyst explained his investment thesis on SBIO.

“Sabio provides digital advertising campaigns and services as well as rich analytics for brand marketers and agencies. The company is focused on the Connected TV market (CTV), one of the fastest-growing segments within digital advertising. Sabio has built a comprehensive technology portfolio and is trusted by some of the world’s leading brands and agencies. While the macro-picture is a short-term headwind, Sabio continues to outperform. The industry has substantial long-term tailwinds including shifting viewer habits that are supportive of continued rapid growth. Sabio is in the early stages of commercializing its analytics platform, App Science. In addition to rapid organic growth, we see meaningful optionality to monetize App Science in the attractive TV analytics market, estimated to be a $1.9B opportunity.”