On today’s Breakouts report, there are 94 stocks on the positive breakouts list (stocks with positive price momentum) and 11 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is an AI play that surfaced on the negative breakouts list a few days ago – Coveo Solutions Inc. (CVO-T).
In November of 2021, this small-cap stock with a market capitalization of $1-billion was listed on the Toronto Stock Exchange – just before central banks began raising interest rates and tech stocks tumbled. The initial public offering price was $15, but the share price closed below $5 by May of 2022. The share price has rebounded to nearly $10, and analysts see much more upside ahead for the stock.
The stock has a unanimous buy-equivalent recommendation from eight analysts. The average one-year target price is $13.56, suggesting the share price has 39-per-cent upside potential over the next year.
This stock may be best suited for consideration by patient investors with a high risk tolerance within a well-diversified portfolio given that the company is not yet profitable.
According to Bloomberg, institutional investors include Caisse de dépôt et placement du Québec and Ontario Municipal Employees’ Retirement System.
A brief outline on Coveo is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based Coveo is a provider of enterprise AI platforms. The company has approximately 675 clients from diversified industries including well-known companies, including Honeywell International Inc., HP Inc., BlackBerry Ltd., Salesforce Inc. and Edward Jones. Contracts are typically three years or longer and its subscription-based model provides revenue visibility.
Chairman and chief executive officer Louis Têtu illustrated the utility, importance and power of the company’s AI applications when he spoke at the company’s annual capital markets day on Nov. 16, “SaaS [software-as-a-service] is a delivery model, but not all SaaS is equal. Some SaaS companies deliver software through a subscription and charge on a monthly basis, but it’s the same software. In our case, it’s a subscription to innovation because we update our software 20 times a day to all of our customers simultaneously worldwide. So when customers subscribe to us, they subscribe to our ongoing stream of innovation in AI. And we have about approximately 300 people, data scientists, and developers improving that platform all day, every day…Whether you deal with a retailer, a distributor, a manufacturer, a health care organization, a bank, you’re going to interact through a website, you’re often going to go into some sort of transactional site… And then oftentimes, once you buy something, you want to come back, you want to come back for the warranty, you want to come back for customer service. Maybe you’re going to try to self-serve or talk to an agent. And then you’ve got people within organizations that interact through digital experiences, the employee experiences through workplace applications, internet, etcetera. We’ve built a platform that essentially supports those areas.”
Quarterly earnings and outlook
The company’s fiscal year-end is March 31.
After the market closed on Nov. 6, the company reported second-quarter fiscal 2024 earnings results that were in-line with expectations.
Coveo reported total revenue of US$31.2-million, up 12 per cent year-over-year and relatively in-line with the consensus estimate of US$31.1-million. SaaS subscription revenue came in at US$29.4-million, up 15 per cent year-over-year. The company reported an adjusted operating loss of US$1-million and a net loss of US$6.5-million. The company has a healthy balance sheet with US$167.8-million of cash and cash equivalents at quarter-end.
On the earnings call, Mr. Têtu commented on potential future revenue growth, “We signed our first five generative AI transaction in our fiscal Q2 [second quarter], including one in commerce that I’ll talk about later, with a substantial number of additional deals expected to close in our fiscal Q3 and Q4. This significant customer interest in generative AI and our platform more broadly resulted in another good quarter for pipeline generation with commerce and our partnership with SAP in particular continuing to represent a significant portion of our growing pipeline.”
However, management reduced its revenue guidance for this fiscal year (fiscal 2024), trimming its expectations for SaaS revenue to between US$117-million and $118-million down from its previous guidance of between US$118-million and US$120-million announced in August. Total revenue was trimmed to between US$124.5-million and US$125.5-million from between US$127-million and US$129-million. But an adjusted operating loss was reduced to between US$9.5-million and US$10.5-million from between US$11.5-million and US$13.5-million.
Returning capital to shareholders
The company does not pay its shareholders a dividend.
In the second-quarter, 940,000 shares were repurchased under the NCIB (normal course issuer bid).
Analysts’ recommendations
According to Bloomberg, after the company released its second-quarter fiscal 2024 financial results in Nov., eight analysts issued research reports – all of which were buy-equivalent recommendations.
The firms providing recent research on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, Eight Capital, National Bank Financial, RBC Dominion Securities, Scotiabank, Stifel Canada and TD Securities.
Revised recommendations
Since the beginning of Nov., four analysts have revised their target prices including:
- BMO’s Thanos Moschopoulos to $12.50 from $13.50.
- RBC’s Paul Treiber to $14 from $13.
- Scotiabank’s David Weiss to $13 from $12.
- TD’s David Kwan to $13.50 from $13.
Financial forecasts
The company reports its financial results in U.S. dollars and the company’s fiscal year-end is March 31.
The Street is expecting revenue of US$125-million in fiscal 2024, US$148-million in fiscal 2025 and US$173-million in fiscal 2026. The consensus EBITDA estimates are a loss of US$3.6-million in fiscal 2024, positive US$2.96-million in fiscal 2025, and positive US$11-million in fiscal 2026.
Revenue estimates have moderated while EBITDA estimates have increased. Four months ago, the Street was forecasting revenue of US$129-million for fiscal 2024 and US$154-million for fiscal 2025. The consensus EBITDA estimates were a loss of US$7.9-million for fiscal 2024 and positive US$1.9-million for fiscal 2025.
Valuation
According to Refinitiv, Coveo is trading at an enterprise value-to-sales multiple of 3.9 times the fiscal 2025 consensus estimate.
The average one-year target price is $13.56, suggesting the share price has 39-per-cent upside potential. Individual target prices are quite concentrated and are: $12.50 (from BMO’s Thanos Moschopoulos), $13, two at $13.50, and four at $14.
Chart watch
Technical analysis is somewhat limited given the stock’s brief trading history. The stock was just listed on the Toronto Stock Exchange in Nov. 2021.
Year-to-date, the share price is up 7 per cent. However, the share price has been very volatile over the short time that the stock has traded. The share price fell from its initial public officer price of $15 to below $5 by May 2022 (closed at $4.90 on May 25, 2022). The share price has recovered to nearly $10.
Looking at key technical resistance and support levels, the stock is approaching a ceiling of resistance around $10. After that, the next major resistance level is around $12. Looking at the downside, there is initial technical support level around $9, near its 200-day moving average (at $9.09).
ESG Risk Rating
Looking at two risk providers, Sustainalytics and MSCI, neither firm has an environmental, social and corporate governance (ESG) risk rating on the company.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty