NowVertical investment thesis $NOW.V

NowVertical $NOW.V

NowVertical investment thesis in a nutshell

NowVertical is a Canadian company that went public in the TSX Venture Exchange market in July 2021. Founded by its CEO, Daren Trousdell, it operates in the Data Intelligence and Business Analytics segments, building Vertical Intelligence through software. The company has been a serial acquirer, having successfully integrated a portfolio of 12 companies (so far) into 4 different software solutions. At current valuations and company growth, it has the potential to be a multi-bagger in the following years.

NowVertical Origin and Management

The company was founded in 2020 by its current CEO, Daren Trousdell, following the foundational acquisition of Signafire Technologies & Seafront Analytics. From then, a series of acquisition have built NowVertical to the C$50M EV company that it is today.

Daren Trousdell has more than 20 years of experience in technology and digital media startups. He has founded, grown and sold several companies across Fintech, Media and Advertising. As founder, he has a significant position in the company with almost 40% of the shares, ensuring a full alignment between company’s management team and shareholders.

He has built a decentralized structure around the company’s software solutions lead by a team of managers experts in their field. As an example, after buying Affinio in 2021, the CEO was named president of the NOW Affinio solution, and that know-how was kept inside the company.

NowVertical Business Model

Now Vertical acquires and integrates small businesses to enhance and expand their software portfolio offering of Vertical Intelligence (VI). Unlike many VMS accumulators, the company integrates each acquisition under NowVertical brand and umbrella, and buckets it into one of its verticals. This way, it builds a stronger and more robust product for its customers.

The Company’s VI software and services solutions address industry-specific needs in three areas:

  1. Data transformation (including data fusion, mobilization and securitization)
  2. Data visualization and analysis
  3. Artificial intelligence and automation
NowVertical solutions

These industry needs are targeted by its four software solutions:

  • NOW Fusion is a database fusion technology that brings together structured and unstructured data from both inside and outside an organization to drive enhanced business analysis.
  • NOW Privacy is a software solution that adds a governance and compliance layer to an organization’s data.
  • NOW DataBench is a unified analytics operating framework that brings business intelligence tools into a single interface to empower more people in an organization to make informed decisions using their data.
  • NOW Affinio offers a privacy-safe data mobilization solution that enables secure data access across internal and external stakeholders, as well as a state of-the-art data clustering platform that creates affinity graphs based on first and third-party data sources that delivers transformative value in the way companies are analyzing data and acquiring new customers.

 

Each solutions solves a specific need in an incremental approach. Firstly, building a structured data base from different unstructured data sources (NOW Fusion). Secondly, adding a compliance and governance layer (NOW Privacy). Then, using business intelligence to analyze this data and present it in a friendly interface, so organizations can extract the most value from it (NOW DataBench). And lastly, creating a secure network for data access (NOW Affinio).

Here are some of the projects and solutions implemented in top-tier customers:

NowVertical Case of Study

Acquisition Strategy

NowVertical uses a mixed approach of cash, equity and debt in its acquisitions. Also, they usually include conditional payments in the following years based on future performance, that can potentially reduce the purchase price and surely delay acquisition costs.

Its acquisition targets consist of small companies of less than $10M in Revenue, 70% Gross Margin and ~20% EBITDA. Given the atomized market in which they operate, they currently have a robust pipeline of acquisitions, which typically are done around 6x EBITDA. 2022 has been the busiest year to date in terms of acquisitions, and for 2023 they are targeting 8-10 acquisitions.

NowVertical Strategy

Revenues and Growth

Following this combined strategy of acquisition and integration, during the first three months after the deal is done, NowVertical maximizes synergies from/to the newly acquisition, cutting costs and boosting cross-selling with other companies and verticals of the group. Through acquisition and expansion, the company has achieved TTM Rev growth of 459% and TTM Adj. EBITDA growth of 83%.

NowVertical Customers

NowVertical grows both organically and inorganically. With a target of 20% of organic growth and +$100M contract backlog for the next three years, this company is far from being a merely serial acquirer accumulator.

Catalysts

There are several catalysts that, in my opinion, will trigger a jump in the company’s share price in the short term.

  • The company will return positive Adjusted EBITDA in Q4’22 for the first time. Reaching the breakeven point is a huge milestone for any startup and supposes an inflexion point for the company’s valuation when reaching future investors. Being profitable is one of the biggest concerns that any venture investor has, and as a result it will put the company in the radar of additional institutional investment firms.
  • Despite being a Canadian traded company, NowVertical mainly operates in the USA. The company plans to IPO in the US OTCQB Venture Market on February 8th 2023 which will make it investable for many US firms that by laws cannot invest in non-US-listed companies. This event, together with the previous point, will move up the trading multiple and close the gap between NowVertical and its peers.

The company is focusing on expanding to new markets, being the latest three acquisitions on foreign soil. Specifically, Acrotrend (UK based) not only allows the company to continue its expansion in that country, but also it has a huge presence in India, becoming the first company’s entrance to Asia. Daren Trousdell has explicitly stated that they will use Acrotrend to open the doors of the biggest IT market on the world. In addition, the next companies in the acquisition pipeline are planned to expand our exposure to this country as well as Australia.

  • NowVertical is a niche and small company currently been covered by only two analysts. A third house will join in the following months, gaining NowVertical more relevance among the research firms.

Risks

  • In a high-interest rates environment, a company that requires access to capital to continue its expansion and growth can be found in a tough position. In order to ensure its continuous operations, the company has renewed in December its credit line with Toronto-Dominion Bank for a C$7 million. In addition, being profitable and having a 20% of organic growth, enable that the company can release the foot from the gas pedal and focus on organic expansion if required.
  • For Daren Trousdell, the company shares are their currency. However, given the current undervaluation in the stock price, taking a heavy equity dilution is not an option for him. When asked about future dilutions, his answer is categoric: “I am the owner of 40% of the company. I am the least interested in any dilution”. This alignment between management and shareholders, mitigates the risk of suffering a acute dilution in the stock base.

Valuation

I know this is going to be detrimental to this thesis competition, but I am not very fan of publicly giving specific valuation figures, as I want people to do their own analysis. Instead, I am going to valuate NowVertical by showing how cheap it is trading, with a couple of napkin valuations.

As NowVertical has not been profitable until Q4’22, its valuation is still deeply discounted, as the market has not reflected that event yet. Consequently, its trading multiples are absurdly low, making a valuation by multiples extremely uncertain. In order to highlight its huge revaluation potential, the company is currently trading at an EV/Revenue multiple of 0.8x, while the sector peers (Palantir, C3.ai…) trade at an average of 4.8x. Meaning that NowVertical’s multiples will have to expand 6 times to reach the sector average.

But NowVertical revaluation story it is not only based on future multiples expansion, but also on its future growth and company’s performance. Ideally, to take growth into account in our valuation we would use PEG metric (created by Peter Lynch). However, because NowVertical’s earnings are still negative and, specially, very near to zero; when making the PEG quotient it is very easy to get a spurious result (you are dividing by a number very close to zero).

For this reason, using revenue figures instead of earnings seems to be a more safe and reasonable way of valuating the company. Also, I prefer to use EV instead of Market Cap. so debt is factored in the valuation model.

Currently, NowVertical has an EV of C$50M and its LTM C$19,26 revenues are growing at an average of +700% CAGR. Therefore, our (EV/R)/Growth ratio would total 0,37x. That means that, considering the current growth pace, NowVertical would have sales that equals it enterprise value in less than 5 months. Outstanding.

Conclusion about NowVertical

We are in the early innings of this story of compounding. Hence, one should approach NowVertical with a start-up mindset, keeping in mind the risks associated as well as the potential reward. A high growth company, that has a bright future in front of it, that it is wonderfully executing its long-term strategic plan (both in terms of acquisitions and organic expansion), with a management with skin in the game that will protect shareholders, an several catalysts in the near months. This start-up is right now transitioning from an initial state, where you have everything to prove; to a mature state, where you are profitable and can pursuit organic expansion and US listing.

Author: Jesus Sanchez León (Castanar IF Fund) – @jessanleon

This investment thesis participates in the Moram investment competition. If you want to vote for it, voting will be open for Moram’ subscribers from this Sunday evening (5th March 2023) to next Saturday.

Disclaimer: This thesis is only for educational purposes and does not constitute any investment advice

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