Description

SharpSpring (SHSP) is a SaaS software company displaying fast revenue growth trading at a low Enterprise Value / Revenue multiple of 3x on 2021E sales.  Its closest competitor is Hubspot (HUBS) that trades at 12x 2021E sales with approximately the same revenue growth rate as SharpSpring.  Granted Hubspot has more scale and is making money, but SharpSpring has higher growth potential as a small firm and a clear path to profitability.

SharpSpring is a cloud-based marketing technology company. The SharpSpring platform is designed to improve the way that businesses communicate with their prospects and customers to increase sales. The Company’s flagship marketing automation platform uses advanced features such as web tracking, lead scoring and automated workflow to help businesses deliver the right message to the right customer at the right time. The SharpSpring platform is designed and built as a Software as Service (or SaaS) offering. The company provides its products on a subscription basis, with additional fees charged if specified volume limits are exceeded by its customers.  

SharpSpring primarily sells to small to mid-sized digital marketing agencies which then resell its products to their end customers.  The company sells 3-packs and 10-packs which allow its digital marketing agency customers to resell to 3 and 10 end customers respectively.  SharpSpring is the low-price leader in the industry and its products sell for roughly 1/10 the price of Hubspot or Marketo, another large marketing automation vendor (owned by Adobe).  For a while, SHSP was catching up in terms of functionality as SharpSpring is only 6 years old compared to Hubspot which is 18 years old.  At this point, SharpSpring has essentially caught up product-wise and this is confirmed by high third-party ratings of its software.  The digital marketing agency market is large with an estimated 100,000 English speaking digital marketing agencies in the world.  SharpSpring has about 2,000 of these currently and Hubspot has a similar number, as well.  SharpSpring also sells directly to some enterprises with about 500 customers of this type currently.        

SharpSpring’s customers are by and large small businesses, many of which have suffered from the pandemic.  The company had a 50% revenue growth target for 2020 coming into the year, but this has declined to 30% due to the Covid-19 situation.  Organically the company should have 20% growth this year, the remaining coming from an acquisition of Perfect Audience in Q4 2019.  The Perfect Audience platform is a product and service offering to small businesses for display retargeting. Perfect Audience is designed for rapid deployment and offers customers an easy-to-use interface to implement and optimize campaigns across all major networks and devices. 

The turmoil in the Small and Medium sized business (SMB) segment can be seen in some of SharpSpring’s metrics.  Net Dollar Retention Rate, which includes churn and upsell, dipped to 92% in the 2^nd quarter from a 99% rate last year.  New customers added to the platform came in at 276 versus 321 in Q1 and 290 last year.  These customers were a little bigger than usual so annualized recurring revenue (ARR) did not suffer as much as its retention metrics. 

Hubspot also serves this market and its revenue growth slowed from 31% in Q1 2020 to 25% in Q2 and is predicted to slow further to 21% in Q3 and 17% in Q4.  Analysts forecast revenue growth to be 21% in 2021, very close to the 20% forecast for SharpSpring.

So where is SharpSpring on profitability?   The company decreased its operating loss last quarter to $900,000 from a loss of $2.5 million in the previous quarter.  This was caused by a significant uptick in gross margin to 74% from 66% last quarter and 71% last year.  In addition, the company cut costs in sales and marketing (less travel expenses, a common theme in many companies) and in research and development (due to the relative competition of its product capability).  SharpSpring believes that a) the gross margin improvement is sustainable and b) they can operate on a leaner model in the future.  There is tremendous operating leverage in the business as it has high gross margins, it is growing very fast, and it has fully built out its product set (after 6 years of development).

SharpSpring’s peer group of SaaS companies trades at much higher multiples than it does.  Most SaaS companies trade at 6 – 8x sales and above.  As mentioned earlier, HUBS trades at 12x sales.  A 12x sales multiple on SharpSpring’s 2021 sales of $36 million would imply a $442 million market cap for SHSP or $38 per share, a near quadruple from its current $10.50 share price.  At a more pedestrian 8x sales, SHSP would trade at $26 per share, a 150% uplift from current levels.  While the company is currently slightly unprofitable today, 20% operating margins in a few years are not out of the question with 20%+ revenue growth, 74% gross margins, and tight operating expense control. 

A takeover by a larger entity is also a possible outcome.  There have been several takeovers in the space, the largest recent one being Adobe’s purchase of Marketo.  As this category of software has multiple products and facets, it is very difficult for new entrants to get into the space.  It would be much easier for a larger entity to make a bite-sized purchase of SharpSpring than to attempt to build a comparable product. 

What risks are there in this situation?  The first is a non-obvious one, as the company is located in Gainesville Florida, it is difficult to attract seasoned talent.  New employees out of the University of Florida are easy to come by but it is difficult to get a seasoned vet to relocate there.  This risk may be tempered by the fact that most people are working from home anyway so it may not be necessary to relocate at all.  Second, SharpSpring is a young company with a new customer base which leads to higher churn than a more established group of customers.  As time goes by this will become a smaller issue as well.  Finally, SharpSpring sells to the SMB market which is in a tough spot right now.  Many small businesses are closing or tightening their belts due to the pandemic.  The good thing for SharpSpring is that its software is the engine that drives sales at these companies, and will be one of the last things that go in a cost cutting exercise.   Finally, liquidity is currently somewhat of an issue for institutional buyers as SHSP only trades 85,000 shares a day on average.  However, if I am right about the rerating of this stock, then liquidity will improve dramatically, perhaps not to the extent of APPS which went from trading 100,000 shares a day at $1.80 to trading 7 million shares a day at $32, but a large increase in its own right.  

Catalyst

SharpSpring could get taken over either by a strategic or financial buyer.  Alternatively, the company could keep growing, attain profitability, and then become pretty profitable on a standalone basis.