E2open Parent Holdings: Massive Potential (NYSE:ETWO)

Today we are revisiting a stock that we successfully traded a few months ago that is a supply chain solutions company. We all have been hearing about terms like inflation, and input costs, and perhaps most relevant to today’s column, the so-called “supply chain”. It may be something you now hear in your regular conversations at your local coffee shop. It was even an issue for our lead analyst’s son’s Little League, as uniforms were backordered two weeks into the season earlier this year due to “supply chain delays”. The bottom line is that many items are taking longer to source, secure, produce, and then ship.

While the situation has improved somewhat, in this environment you would think that companies that work to help other companies handle their supply chain should be doing well. The supply chain solution company we are now highlighting today is a tech company, and so it’s been murdered along with all other tech type stocks. The company just reported earnings and, yes, it will lose money this year as it has been expanding operations, but it still is on track to swing back to profit for the fiscal year ending Feb 2023. So, the company in question is one you probably have never heard of or done any business with. The company in question is E2open Parent Holdings (NYSE:ETWO). As we speak, the NASDAQ is getting crushed, despite being off lows. We think the stock is a buy if it dips lower again, for a hold into 2023 as a medium-term trade.

The play

Common stock is recommended here with a plan to scale into the stock:

Target entry 1: $7.30-$7.40 (25% of the position)

Target entry 2: $6.50-$6.60 (30% of position)

Target entry 3: $5.75-$5.80 (45% of position)

Target exit short term $8.50

Medium term $10

Stop loss $4.75

Discussion

Make no mistake, this market is still tough. So, we want to buy 25% of the position now, then complete it if the stock trickles lower. If it rallies, we take the gains; if it falls, we complete the position. But, we really like what they are doing here. From a higher level view, their solutions start with a physical network which includes connectivity with and visibility into trading partners. It is data oriented, and we love companies using data. The data is fed to applications and used for decision-making. They offer 100% cloud-based, supply chain management software. E2open’s network is composed of four parts: Demand, Supply, Logistics, and Global trade. E2open generates revenue from software subscriptions and professional services. Because it is “tech” it has been crushed. We need to look ahead to the future potential. Earnings are coming. Supply chain complexity has increased for years. Combined with the challenges from COVID, logistics and supply chain management technology providers like E2open are in demand.

This was evidenced in the just-reported quarter. Revenue is exploding higher although it was in line with consensus estimates. Subscription revenue grew 153.9% from the year-ago comparable period to $129.5 million or 80.8% of total revenue. That is winning. Organic subscription revenue growth was 10.7%. Subscription revenue is great because it is recurring. It is why many companies have moved away from one-time type products or services in many tech fields. Overall revenue in Q1 jumped 141.8% to $160.4 million compared to last year.

Margins improved

Software as a service companies tend to have decent gross margins. But we love to look for margins that are improving. With revenue up so much we did see a commensurate increase in gross profit of 190.0% from the year-ago period to $81.7 million. Adjusted gross profit grew 9.3% to $111.3 million. The company saw 50.9% gross margins compared to 42.5% last year, while adjusted gross margin was about flat at 69%. This led to some gains and earnings.

Earnings power improving

Adjusted EBITDA in Q1 was up 12.4% to $51.4 million. Positive adjusted EBITDA is great. Adjusted EBITDA margin was up as well. It came in at 32.0% versus 31.3% from last year. However, with heavy expenses, the company is still losing money, but real profits are on the way, and not just on an EBITDA basis. We saw net losses of just $12.6 million in the quarter compared to a massive loss of $169.4 million just a year ago. This is a sizable improvement. You have to love this action. It speaks volumes about the future potential. So, GAAP earnings per share were a loss of 4 cents, but on an adjusted basis we saw a profit of 7 cents per share.

Strong balance sheet

The company had some merger and acquisition expenses, but cash flow from operations was $24.9 million. This is lower than the $39.3 million last year but was inclusive of merger expenses. However, free cash flow for the first quarter, adjusted for acquisition costs was $41.3 million, which represents 80.3% of adjusted EBITDA. They have a massive $129 million in cash on hand as well. The company also has been buying back stock. Back in January they announced a stock repurchase program to buy back up to $100M of its Class A common stock over the next 12 months

Forward view

When we view performance the company is clearly succeeding in adapting to growing inflationary pressures, and increasing demand and supply challenges. The subscription revenue continues to grow. We believe sustain profitable growth is on the way. Management also reaffirmed its EBITDA outlook for the fiscal year. The company is forecasting subscription revenue for the year to be in the range of $538 million to $546 million versus prior guidance of $545 million to $553 million, due to an approximate $7 million negative impact from foreign exchange rate fluctuations. Total revenue will be $672 million to $680 million also being revised due to constant currency issues. Adjusted gross profit margin was narrowed to 68% to 70%. This is still very strong, while the adjusted EBITDA was restated to be $217 million to $223 million. This is a winner. And, the company is offering growth and value. The metrics are attractive for a tech investment, and Seeking Alpha gives a grade of A- for both valuation, and growth.

In this market, finding value and growth is rare. This is a future winner. Buy the stock.