Thryv: Stock Is Not Attractive Enough Yet (NASDAQ:THRY)

Overview

The changing business climate has presented challenges for SMBs, who are under increasing pressure to provide cutting-edge solutions to customers and adapt to the proliferation of digital options. The market for software aimed at SMBs is large and fragmented, but THRY has a strong background in the SMB space and an integrated solution that has been tailored to the needs of SMBs based on the company’s extensive knowledge of the industry. While I believe Thryv Holdings (NASDAQ:THRY) has a good market position and enjoys positive secular trends, the valuation is not attractive enough to go long today.

Business description

To help businesses succeed, Thryv offers cutting-edge advertising services and online resources. It offers SaaS end-to-end customer experience tools in addition to print and digital marketing services for small and medium-sized enterprises in the United States. Its products and services help SB find new customers, maintain healthy connections with existing ones, and operate smoothly on a daily basis.

SMBs must change the way they operate

Due to technological developments that have given the consumer more choice than ever over how, when, and where they do business, the business climate in which SMBs function has experienced a significant upheaval. The changing economic climate, in my opinion, has posed serious difficulties for SMBs

Increasing demands from customers provide a pressing problem. Customers have become accustomed to receiving cutting-edge solutions via consumer-facing websites and mobile apps. Large corporations have perfected conveniences like one-click online shopping, instantaneous ride-sharing, and app-based meal delivery. The creation of “frictionless” client experiences is a difficult task for many SMBs. I believe this is a long-term trend, and SMBs who don’t find ways to adapt will inevitably lose ground to more agile rivals.

Similarly, the proliferation of digital options has lowered entry requirements. SMBs that intended to open a new business (such as a store) previously had to go through the steps of finding a space, buying supplies, obtaining licenses, and so on. These days, anyone with an idea and some web design skills may launch a successful business. Because of this, there is a lot of competition in the consumer market. Since more and more people are turning to the internet for information, SMBs have a harder time reaching out to their target audience. That said, there are still people who prefer to get their news in paper. In my opinion, it is getting harder for SMBs to target both types of consumers with a unified approach.

Large and fragmented TAM

Thryv faces stiff competition in the expansive and splintered market for software aimed at SMBs, which has seen an uptick in digital solution adoption as a result of COVID (along with the other factors mentioned above). Companies providing services have had to quickly adjust to the modern way of conducting business in order to meet rising client demand, which has occurred across many different types of organizations. In line with the acceleration of many other trends caused by the pandemic, I anticipate that SMBs will continue to embrace digitally-focused, cloud-native platforms to operate and expand their operations. And also because SMBs use of these cloud-based digital solutions has trailed behind that of large corporations for some time. Due to the expansive nature of this market, I anticipate widespread success as usage spreads. Thryv isn’t the only game in town, but I think it has a good shot at capturing a sizable chunk of its core market because of the breadth and depth of its platform, its extensive knowledge of the field, and its track record of innovation in response to customers’ evolving wants and needs.

Strong background in the SMB space with an integrated solution

As a company with decades of expertise serving the SMB industry, THRY has a significant leg up on the competition because of its extensive knowledge of the SMB sector. As a result of many of THRY’s employees and managers having worked with SMBs for a long period of time, the company has developed sticky client connections and a great knowledge of how SMB clients utilize THRY’s products. The significance of THRY’s experience advantage in the marketplace is sometimes overlooked because it is not shown in their financial reports, but I believe it helps them better tailor their offering to the requirements of SMBs. As a result, the SMB market will adopt THRY more widely, and the superiority of the product will spread by word of mouth.

Furthermore, THRY works with top-tier SMB 3P developers to distribute its platform, guaranteeing the highest quality possible. By adopting a platform design, THRY offers a SaaS solution that can easily adapt to changing business needs and scale to meet growing demand. THRY has stiff competition in the SMBs market from a wide range of regional and industry players, making both of these aspects of its business vitally important.

Strong go-to-market strategy

The various components of THRY’s go-to-market strategy include an in-house sales team, resellers, and channel partners. Most solution providers utilize inbound marketing strategies like search engine optimization and digital ads to bring in new clients, as these methods are low-cost and labor-light. As a result, I believe that THRY’s competitive edge lies in the fact that they have a physical presence in the local areas and customer call centers everywhere in the nation. In addition, many SMBs have worked with the same sales representative for decades, so they understand his or her value and are comfortable with him or her enough to discuss the benefits of THRY products face-to-face, online, or over the phone.

I think THRY should expand its already massive national sales team in order to better differentiate itself and acquire more clients. THRY has a large sales force that has expertise dealing with SMBs and marketing software solutions. As SMBs increase their remote work capabilities and use of digital solutions, there is a growing demand for SaaS solutions, making it an ideal time for THRY to increase its investment in S&M in order to speed up its expansion.

Payments module could be a huge growth driver

ThryvPay, the payments module of the THRY platform, is an all-in-one payment solution that allows small and medium-sized businesses to take payments through credit card and ACH from customers using the THRY website or mobile app. SMBs can take advantage of ThryvPay’s additional features, such as the option to implement convenience fees and schedule payments. Beyond its obvious practicality, I think ThryvPay can expand THRY’s reach and TAM by attracting new customers who aren’t in the software business. In spite of the fact that the payments solution is just getting started and only makes up a small fraction of total revenue, I think the opportunity is big and it can generate a highly profitable revenue stream. In my opinion, the payment company is undervalued by the market, thus any noteworthy achievements will increase the stock price.

Forecast

I believe the long-term trend for THRY is positive; however, there are significant near-term headwinds. The global macro-slowdown will have a direct impact on THRY in FY23, and as a result, I anticipate a significant drop in revenue, similar to what the consensus is projecting. In FY24, I anticipate that growth and margins will gradually improve.

THRY is currently trading at 6x forward EBITDA, which is higher than the industry average of 4.6x. I believe that the slower growth and near-term headwinds do not justify this valuation multiple and that THRY should return to its average multiple.

With these assumptions, I believe THRY is not a compelling investment opportunity at the moment.

Key risks

Huge exposure to SMB

There could be negative consequences on Thryv’s customer base if there is an increase in the number of SMBs bankruptcies or a drop in the number of new businesses being created. SMBs have greater rates of failure, employee turnover, and employee retention than do medium and large businesses.

Competitive landscape

Thryv has stiff competition from a plethora of SMB software vendors, some of which are significantly larger and better funded than it is. I think there’s room for several successful players in this industry, but Thryv needs to keep making improvements to its platform if it wants to survive.

Conclusion

SMBs are facing pressure to innovate and adapt to an increasingly digital marketplace as a result of the current economic climate. Despite the vastness and dispersion of the market for software catering to SMBs, THRY stands out with a solid history in the SMB sector and an integrated solution that is specifically designed to meet the demands of SMBs. As much as I appreciate THRY’s solid market position and favorable secular trends, I cannot justify a long position at the current value.