For regular readers of the Breakouts report, it will return next week. In the meantime, featured this week are a couple of companies that have recently begun trading. As a result, they do not have enough trading history in order to appear on the breakouts list even though their share prices are on the move.
Discussed today is one such newly listed stock that is off to a strong start – VerticalScope Holdings Inc. (FORA-T). While the stock just began trading on the Toronto Stock Exchange on June 15, its share price is already up 23 per cent from its IPO price.
On July 9, the share price rallied over 11 per cent, closing at a record high, after three analysts launched coverage on the company – all with buy recommendations. Investors may want to put this small-cap stock on their radar screens.
A brief outline on VerticalScope is provided below that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
The company
Toronto-based VerticalScope operates a cloud-based software platform for online communities. The company has over 100 million MAU (monthly active users) across more than 1,200 online communities.
So what exactly is an online community? Online communities are websites where members can share and gain information on specific topics. A well-known example of an online community on the company’s Fora software platform is RedFlagDeals where over 1-million members see shopping promotions and deals. Other examples of online communities on the Fora platform include: MTBR, for mountain biking enthusiasts; Piloteers.org, for members interested in the Honda Pilot SUV; and SpeakEV, an electric vehicle forum.
In terms of the company’s 2020 geographic revenue breakdown: 62 per cent stemmed from the U.S., 12 per cent from Canada, and the balance, 26 per cent from other regions.
The company has two core revenue segments: digital advertising and e-commerce.
In 2020, digital advertising represented 56 per cent of total revenue. The company has over 400 advertising customers including Canadian Tire, Chevrolet, Toyota, and Sony. In the first-quarter of 2021, a large share of the company’s MAU and revenue stemmed from automotive and fitness-related communities.
VerticalScope’s other main revenue source, e-commerce, represented 44 per cent of total revenue last year. Product reviews on these online communities along with targeted advertising can lead to purchases. The company receives commissions of up to 15 per cent of the transaction value for sales that it drives to over 70 e-commerce merchant partners including Amazon, eBay, and Best Buy. The company’s top three e-commerce merchants accounted for over 20 per cent of total revenue in the first-quarter of 2021.
There is seasonality in the company’s operations with the highest revenue typically occurring in the fourth quarter, and lowest in the first quarter. Customers allocate greater spending to the fourth quarter. For instance, advertising spending by companies often peaks in the fourth quarter as businesses try to generate high sales during the holiday season.
In the final prospectus, founder and chief executive officer Rob Laidlaw remarked on his strong commitment to strategically growing the company/ “We want to bring more communities onto the Fora platform by re-accelerating our M&A [merger and acquisition] engine. We believe there is a significant opportunity ahead to do disciplined, accretive acquisitions of topic-focused communities for long-term growth on our platform. As the founder and CEO of VerticalScope you can expect me to be a great steward of capital who is focused on providing investors with growth and profitability. I will ensure that we remain focused on maintaining the strength of our software platform, executing on accretive M&A and delivering profitable growth with high margins and free cash flow. I am not taking any money off the table in this IPO as I am all-in on VerticalScope’s future. I voluntarily took the longest lockup suggested because I have poured my heart and soul, and all of my passions, into VerticalScope over the last 20 years, and can’t wait to do so for the next 20.”
The company has a dual-class structure with subordinated voting shares, as well as multiple voting shares that are 100 per cent owned by CEO Rob Laidlaw through RDL Ventures Inc.
Investment thesis
· Growth stock trading at a reasonable valuation.
· Organic revenue growth. For the trailing 12 months ending March 31, 2021, the company realized 11 per cent organic revenue growth.
· MAU (Monthly Active Users) growth. For the trailing 12 months ending March 31, 2021, MAU grew 9 per cent.
· Acquisition growth is ramping up. Management plans to accelerate its acquisition growth. Management is currently in advanced discussions with 20 potential acquisition targets, which if completed in the next 12 months may result in an annual adjusted EBITDA contribution of U.S. $18-million. Between 2022 and 2023, management anticipates completing roughly 50 or more acquisitions, providing an annual adjusted EBITDA contribution of U.S. $50-million or more. Management notes that these forecasts do not include very small acquisitions.
· High margins with room for margin expansion. In the first quarter of 2021, the adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin was 48 per cent.
Financial results
Financial results are reported in U.S. dollars.
For the first quarter of 2021, the company reported revenue of $15.9-million, up 41 per cent year-over- year from $11.3-million reported during the same period last year. Adjusted EBITDA was $7.7-million, up 144 per cent year-over- year from $3.1-million reported last year. The adjusted EBITDA margin improved to 48 per cent from 28 per cent realized last year.
Dividend policy
Management is focused on growing the company and does not plan to pay a dividend to its shareholders at this point in time.
Analysts’ recommendations
Last week, three analysts initiated coverage on VerticalScope – all with buy recommendations.
· Canaccord Genuity’s Aravinda Galappatthige has a target price of $29.
· National Bank’s Adam Shine has a target price of $36.
· RBC’s Drew McReynolds has a target price of $31.
Other firms involved in the underwriting syndicate include Cormark Securities, Desjardins Securities, HSBC Securities, Raymond James, and TD Securities. Consequently, it would not surprise me to see other analysts launching coverage on this stock in the future.
Financial forecasts
Financial figures are expressed in U.S. dollars.
Analysts are forecasting strong growth for the company. The consensus revenue estimates $67-million for 2021, up from $56.9-million reported in 2020, and $78-million in 2022. The consensus adjusted EBITDA estimates are $32.7-million for 2021, up from $26.6-million reported in 2020, and $39.5-million in 2022.
Valuation
Analysts commonly value the stock on an enterprise value-to-EBITDA multiple basis.
The average one-year target price is $32, suggesting the share price may appreciate 18 per cent over the next 12 months.
Chart watch
Technical analysis is limited due to the stock’s brief trading history. The stock began trading on the Toronto Stock Exchange on June 15.
This small-cap stock can thinly traded. As a result, the share price can be volatile. To illustrate, last week, less than 100,000 shares traded each day.
Please note that this report is not an investment recommendation. This report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis on a security to provide readers with more information.
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Jennifer Dowty