SaaS Gem Becoming a Crown Jewel ?
Contract security, customer momentum, high reinvestment rates and owner earnings yield, and an index inclusion align
Disclaimer: I own shares of the company discussed in this article and stand to benefit if they rise in price. I may decide to purchase or sell shares at any time without prior notice. Do your own research and size positions appropriately if you invest. Nothing here is meant to be understood as investment or financial advice. I use AI tools to help me in my research, writing, and editing processes.
TL;DR
The company’s largest customer renewed, eliminating major downside risk
SaaS revenue growth shows signs of acceleration
Customer acquisition rate is improving by 20%. If sustained, a strong validation of the value proposition
Potential Russell Index inclusion could create strong short-term volatility
I estimate a reinvestment rate of 75% with a focus on accelerating its SaaS growth and an Owner Earnings yield in the double-digits.
Tight float (2.5M shares) amplifies the potential moves of this $50M company.
Introduction
Quality small-cap SaaS companies trading at reasonable valuations are scarce. I believe this illiquid microcap company shows an intriguing case of risk and early signs of growth acceleration. The company just renewed its largest customer, which eliminates major downside risk, resolving an issue that was looming over the company since the start of the year. For reference, see my earlier article:
This post also analyzes the company’s accelerating fundamentals. Customer acquisition rates are up 20%, the latest quarterly SaaS revenue growth rate hints at a revenue growth acceleration, and management's 75% reinvestment rate signals confidence in the growth trajectory ahead. More explicitly, the high rates of reinvestment paired with attractive margins and the capital-light nature that “just” requires investing through the income statement into the expansion of its sales activities to increase its share within a vast market, make for a powerful setup. Finally, with only 2.5 million shares in the float and potential Russell Microcap inclusion, I expect high volatility in the near term. After adjusting for the company’s elevated investments in sales and marketing, I estimate the current Owner Earnings yield to be in the double digits.
In summary, this article examines four key developments:
The resolved contract risk
Accelerating SaaS metrics
The company's reinvestment patterns (for which I apply the
approach mentioned in this article)The potential index inclusion in combination with a low float could cause wild share price gyrations.
Outline
Introduction
Risk Reduced: Contract Win
Growth Acceleration: SaaS Revenue Growth & Value Proposition
Capital Efficiency: Estimating Reinvestment Rate & Owner Earnings
Tactical: Russell Index Inclusion
Conclusion
Disclaimer