Description

TechTarget (TTGT) is an online lead generation engine for technology businesses.  The company manages 200 individual websites focused on different subsectors of technology.  These sites feature product selection advice, technology tips, white papers, and other relevant information.  The material on these sites is a combination of content produced by TechTarget’s large editorial staff and well as product collateral submitted by technology vendors.  In order to see all of this content, users must register with TechTarget.  TechTarget gauges the buying intent of these users by how many times and for how long they visit each site, and by what they look at on that site.  This powerful buying intent information is then passed on to TechTarget’s customers so they can know which firms are looking to make a technology purchase and with what urgency.

Originally when we first encountered TechTarget’s business five years ago, it was mostly focused on branding for its enterprise customers.  It was also heavily dependent on large customers with its top 10 customers comprising 40%+ of its revenue.  The company then developed its IT Deal Alert product, which focused on delivering purchasing intent data to its customer base.  This was a revolutionary new product as its customers now knew where the hot deals were and where to focus their sales efforts.  This product worked best for large customers with name recognition who could insert themselves into existing deals and be successful.  Smaller customers who were not well known had a tougher time penetrating existing deals and RFPs. 

TechTarget then launched an offshoot of IT Deal Alert called Priority Engine.  This product integrated with CRM systems such as salesforce.com and Marketo and showed the deal intent data for each of the potential customers in the CRM database.  This allowed customers to go after leads earlier in the deal process making them more likely to succeed.  Priority Engine has grown at a fast clip, recording 27% year-over-year growth in the latest fiscal quarter.  Priority Engine has also caught on with mid-sized customers and broadened TechTarget’s customer base.  Now only 21% of TechTarget’s revenue comes from its top 10 customers, showing significantly less concentration than a few years ago.

TechTarget recently introduced a new product, Priority Engine Express.  While TechTarget has traditionally targeted the top 1,500 tech companies as customers, Priority Engine Express is a scaled down version of Priority Engine focused on the next 5,000 players in the industry.  It costs about $30,000 a year versus $90,000 for the fuller Priority Engine product.  Currently the company is soft-launching Priority Engine Express with three salespeople and will ramp up the sales effort with success of this initial ramp.  We think success with this product can accelerate TechTarget’s growth rate beyond the 10% range. 

Currently 15% of the company’s business is its legacy branding product, where customers either place banner ads on its sites or sponsor various areas of its web pages.  The rest of the business is IT Deal Alert and Priority Engine.  These products are still driving significant revenue growth even four years after launch.  They make a lot of sense to customers, as what salesperson would not want to know where the hot deals are or which leads are looking at which types of products?   The stock has had a great run since its $5 days but the fundamentals have had an equally good run which is why the stock is attractive at these levels.

TechTarget’s business model has powerful operating leverage.  With high (77%) gross margins and mostly fixed operating costs (basically the costs of operating the sites, sales & marketing, and R&D), the revenue drop-down to EBITDA is impressive with a 50-70% incremental EBITDA margin.  In 2019 incremental EBITDA margins were even higher, near 90%.  The company is forecasting a 50% incremental EBITDA margin for 2020 but it has been known to be conservative in its forecasts. 

Competition for TechTarget is virtually nonexistent as it is a niche business which has taken years to build.  To duplicate all of the company’s websites and content would take a very long time.  Quinstreet (QNST) has a somewhat similar model but is focused on the insurance industry.  Rather than duplicating TechTarget’s work, it would be much easier for a larger player to come in and purchase TechTarget. 

TechTarget is exceptionally well managed.  Greg Strakosch, the company’s Chairman, founded the business in 1999 and was CEO from then until May 2016.  Mike Cotoia, the current CEO, has been with the company since 2002 and was Chief Operating Officer from January 2012 until his ascension to the CEO position in 2016.     

The company is not overly reliant on Google for its web traffic.  94% of the company’s traffic is organic and most users know the company’s sites well and visit there directly.  Google’s proposed discontinuation of cookies on Chrome plays to TechTarget’s relative advantage as the company has very little reliance on cookies as compared to other small players in the industry. 

While TechTarget’s products were traditionally sold on a quarterly basis the company has been moving towards a more predictable annual sales model over the past few years.  Currently 35% of sales are recorded on an annual basis, up from virtually zero five years ago.  The company’s goal is to get to 50% annual contracts over the next few years. 

TechTarget is a little-known name and although financial results and stock returns have been good, we feel there is a long way to go.  We are forecasting 10% revenue growth in 2020 and acceleration to 14% revenue growth in 2021 as Priority Engine Express kicks in.  This translates to $49m in EBITDA in 2020 and $63m in 2021.  Given the 30% growth in EBITDA in 2021 we feel that a 20x multiple is appropriate.  This would result in an equity value of $1.3 billion or $45 per share, a 75% increase from current levels.    

The main risk to the TechTarget story is overall IT spending.  When IT spending is weak, customers cut back on their sales and marketing spend and this hurts TechTarget’s business.  While TechTarget has a more diverse customer base than it did a few years ago, an industry-wide slump in IT spending will filter down to TechTarget’s P&L.  The other risk is that Priority Engine Express is not successful which would leave my 2021 revenue estimate to be overly optimistic and the company would likely fall short of my 2021 EBITDA estimate as well. 

Catalyst

The main catalyst to look for is the acceleration in TechTarget's revenue growth rate due to Priority Engine Express in 2021.