coffeekai
Shares of TechTarget (NASDAQ:TTGT) have seen a tough year, which does not come completely unexpected as I concluded that shares were moving beyond their target at the start of 2021.
Let’s go back to that point in time, to see where the company and its shares are coming from, and what the outlook brings for the business.
A Recap
TechTarget describes itself as a data-driven marketing analytics and sales-enablement solutions provider. The company believes that IT vendors can fuel their pipelines in a faster manner using its services, fulfilling a marketplace function between IT vendors and professionals.
The company owns 140 niche websites which attract 20 million members visiting these websites, achieved on an organic and non-paid basis. In essence, the company aims to operate as a marketplace between 20 million IT professionals which read articles, provide reviews and write white papers, being connected with IT vendors. These vendors can target their clientele in an efficiency manner through this platform, creating recurring revenue streams.
The company has grown the business from $100 million in sales to nearly $150 million between 2016 and 2020, as EBITDA has risen from $18 million to $49 million, driven by further margin gains thanks to an increased portion of recurring sales. This transition and aggressive buybacks made that a $2 share in 2009 rose to the $10 mark in 2017, having risen to $60 in January 2021.
At that point in time the company was set to generate nearly $150 million in sales in 2020 on which adjusted EBITDA of $48-$49 million was expected. Despite accelerating momentum and a $150 million acquisition of BrightTALK, I only saw the run rate in profitability around a dollar per share, resulting in sky-high valuations at 8 times sales and 60 times earnings.
Higher, Than Lower
In the weeks after I reviewed the potential of the shares in January 2021, shares rallied to the $100 mark in February, levels seen again later that year. Ever since, shares have sold off in a steady fashion, having fallen to $43 per share.
In February of this year, the company posted rather impressive 2021 results. Full year sales rose 77% to $263 million, with the run rate exceeding the $300 million mark already. The earnings numbers were distorted as GAAP earnings for the year were virtually non-existing, with adjusted earnings reported at $72 million, or $2.22 per share based on 32 million shares outstanding.
While I am happy to adjust for amortization expenses, foreign exchange moves and debt extinguishment costs, I am not happy to adjust for a $38 million pre-tax stock-based compensation expense, equal to about a dollar per share. This means that realistic earnings power only exceeds the $1 per share mark in a modest fashion, pegged around $1.20 per share.
The company ended the year with $381 million in cash and $453 million in convertible debt, as the conversion element is key of course and is directly tied to the share price level.
For 2022, TechTarget guided for revenues to grow to $310-$315 million with EBITDA seen between $120 and $125 million, up from $105 million in 2021. The expected $15-$20 million EBITDA increase has the potential to add around half a dollar per share to realistic earnings, which implies realistic earnings around $1.70 per share. The share price was far too high in relation to this earnings power, leaving no appeal here in my view.
Despite a free fall in the share price in the first half of the year, the company has seen solid operating momentum. Following a strong first quarter, the company hiked the midpoint of the sales guidance to $316 million, with the midpoint of the adjusted EBITDA guidance being hiked to $127.5 million.
While the company maintained the guidance following the second quarter results, the company missed its estimates in the third quarter, for the first time in about a decade. This triggered a big reset in the full year guidance, with sales now seen at just $295 million albeit that the midpoint of the EBITDA guidance of $122 million has come down modestly, a comforting sign.
With earnings power so far reported at $1.88 per share, a $2.50 per share number for the year seems realistic. As stock-based compensation is trending at $40 million, realistic earnings come in around $1.50 per share based on 34 million shares outstanding. This shows that with shares trading at $43, the resulting earnings multiple is still rather expensive at around 30 times.
Holding $384 million in cash, the company has incurred as small net debt position with $455 million in (convertible) debt outstanding. This position is still rather comforting, but recent news is not that comforting as the third quarter weakness seems to extend into the fourth quarter as well. This is evident with the company announcing a restructuring, laying off 5% of its workforce in December.
Still Holding Off
With shares down 60% from their highs, the pullback is large, but so was the run higher in recent years, as this was a $20 stock pre-pandemic. Based on the fundamental earnings power, the multiples remain far too demanding, with the company being aggressive in its adjustments, which combined with little growth in the quarters to come in all likelihood creates a tough set-up.
Hence, I see no reason to get involved just yet at these levels.
Be the first to comment