Is Thinkific Labs a buy?

Following the company’s first quarter results, ATB Capital analyst Martin Toner has maintained his “Sector Perform” rating on Thinkific Labs (Thinkific Labs Stock Quote, Chart, News, Analysts, Financials TSX:THNC).

On May 7, THNC reported its Q1, 2024 results. The company posted Adjusted EBITDA of $200,000 on revenue of $16.0-million, a topline that was up 13 per cent over the same period a year prior.

“We continue to execute against our strategy of profitable growth as evidenced by our solid Q1 results, and we saw strong growth in GMV representing the sales our customers are earning. We continue to see that customers who adopt Thinkific Commerce sell more. We’re proud to deliver this suite of features to help them grow their businesses,” said Greg Smith, chief executive officer of Thinkific. “We also signed a partnership with Spotify to test a program in the United Kingdom that offers courses alongside music, podcasts and audiobooks in the Spotify app. Spotify’s pursuit of this opportunity validates the size of the market we see ahead of us. It’s also an extension of our unwavering commitment to the success of our customers and part of our strategy to deliver the best tools and partnerships to help them grow their businesses. When our customers succeed so does Thinkific.”

The analyst gave his take on the quarterly results, and why he is not yet ready to recommend the stock.

“After market close on May 7, THNC reported Q1/24 consolidated revenue of $16.0mm (+13.3% y/y), in-line with consensus of $15.9mm. Adjusted EBITDA of $0.2mm was in-line with consensus, and net loss of $1.1mm slightly beat consensus of a $1.6mm loss,” he noted. “Management’s Q2/24 revenue guidance of $16.1mm-$16.4mm represents growth of 12%-14%, and was in-line with consensus. On its bottom line, THNC’s Q2 guidance continued to be to maintain positive adjusted EBITDA. THNC’s results in recent quarters have been driven by the adoption of new high-value services that the Company has introduced. Commerce revenue, driven by payments penetration, is helping the Company maintain double-digit growth while the number of paying customers remains relatively flat. The Company believes that The Leap is improving the customer on-boarding process and improving customer success metrics, which will lead to paid customer growth over time. While we are impressed with the results of the Company’s recent initiatives, we remain Sector Perform until paid customer growth can push the Company’s growth higher on a sustained basis.”

In a research update to clients May 8, Toner maintained his “Sector Perform” rating and one-year price target of $4.50 on THNC, implying a return of 33.5% at the time of publication.

The analyst thinks THNC will post an Adjusted EBITDA loss of (USD) $100,000 on revenue of $67.7-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of positive $2.0-million on a topline of $82.3-million in fiscal 2025.

“Our price target represents a 33.5% return to target, and is based on our discounted cash flow (DCF) valuation, using a 14.5% discount rate and 3.5% terminal growth rate. Our discounted terminal value of $124.3mm represents 65.2% of total enterprise value (EV) of $190.7mm, as well as a 7.5 EV/EBITDA multiple, and a 1.5 EV/Revenue multiple,” Toner added.