AVDX - AvidXchange: Rating Upgrade As Management Outlook Is Very Positive

2023-08-15 08:19:52 ET

Summary

• I revised my rating from hold to buy.
• AvidXchange exceeded expectations in 2Q23, with improved EBITDA and revenue growth of 19%.
• Management's increased revenue guidance and accelerated adj. EBITDA profitability outlook boost my confidence in AVDX's performance.

Summary

AvidXchange ( AVDX ) specializes in providing AP software and payment solutions targeted at middle-market businesses. Following my coverage on AVDX, I recommended a hold rating due to my expectation that the business is going to face a tough comp in its media vertical, making the rest of FY23 look weak in terms of percentage growth. This post is to provide an update on my thoughts on the business and stock. I am revising my hold rating to a buy as I gained confidence in AVDX's ability to continue growing at a high-teens (near 20%) growth rate for the rest of FY23. However, I would caution against keeping the investment stake small and only size up when the key catalyst (AVDX returns to a >20% growth rate) crystalizes.

Investment thesis

For 2Q23, AVDX surprised me by performing above expectations and meeting or exceeding consensus estimates. There was a $3 million improvement in adjusted EBITDA, and revenue grew by 19% . The fact that AVDX achieved such a high transaction yield during the quarter is noteworthy. From my perspective, this indicates that they are making headway toward their objective of increased monetized payment penetration (the fundamental growth story of converting check payments to electronic). Management increased revenue guidance from $363 to $368 million to a range of $368 to 370 million, an increase in the midpoint of $4 million, in light of the positive results. This runs counter to my earlier predictions, which predicted a weak growth profile for AVDX in FY23. Even though the new forecast calls for growth of less than 20%, I believe that management's decision to increase projections should boost confidence. More importantly, my focus for the new guidance was that management accelerated their adj. EBITDA profitability outlook, raising the midpoint of the range from $3 million to $7.5 million. Importantly, this means that adjusted EBITDA will be positive in FY24. In my opinion, the new guide should be easily achievable, as the management macroview is largely unchanged. Generally speaking, they have seen a calming in the business climate, which is in keeping with their expectations.

Moreover, it is worth noting that the middle market and AVDX continue to perform strongly despite management's comments about moderation that has persisted all year. That said, top-of-funnel expansion of 17% over the previous year suggests healthy double-digit growth in most industries with the exception of commercial real estate, which is experiencing sluggish conditions. Nonetheless, adjusted EBITDA showed a sequential improvement of 283 basis points, which I believe is an important part of AVDX equity story as it gives investors something to chew on and gain confidence that AVDX has the ability to sustain profit growth and meet consensus profit expectations. Notably, the market expects AVDX to generate $83.5 million in EBITDA by FT25, which would imply an EBITDA margin of 16%. Compared to the predicted 2% EBITDA margin for FY2023, this is a significant increase. I would also add that the additional information provided during the earnings call was helpful, especially with regards to the impact of political advertising on take rates. As a result, it appears that take rates would be rising even if political advertising budgets weren't being cut.

After such a strong and unexpected showing in 2Q23, I am increasingly optimistic about the company's prospects for the remainder of FY23. The fundamental long-term story remains unchanged, as AVDX should continue to see the adoption of electronic payment methods. Organic growth is expected to improve with the introduction of new products like Invoice Accelerator 2.0 in 4Q23. However, I believe a key catalyst for the stock to see further momentum is when AVDX re-enters the 20% growth territory, as this would convince the market that the slowdown in FY23 was due to a strong FY22 and that nothing structural is impacting the business.

Valuation

I believe the fair value for AVDX based on my model is $14. My model assumptions remain the same as my previous model, but with minor adjustments to FY23 growth to reflect the new guidance. I believe the slowdown in FY23 is a matter of tough comps and a weak macro environment. Despite these headwinds, AVDX continues to grow at a very healthy rate (just 300 bps shy of 20%). Once the economy recovers, I believe AVDX should see growth reaccelerate to 20% as well. The AVDX valuation multiple (EV/NTM revenue) should continue to trade in line with peers, just as it has historically done given a similar growth profile. Peers include Paymentus Holdings ( PAY ), BILL Holdings (BILL), Flywire (FLYW) , EngageSmart (ESMT), and ACI Worldwide (ACIW). The median forward revenue multiple peers are trading at is 4.5x forward revenue.

Conclusion

In conclusion, my analysis of AVDX reflects a positive outlook. The company's performance in 2Q23 has boosted my confidence and that management's revised guidance, even though projecting growth under 20%, signals increased confidence and profitability expectations. The company's resilience in the face of moderation and the 17% top-of-funnel growth demonstrate solid performance across sectors, barring commercial real estate. Notably, the expected EBITDA increase and insights from the earnings call enhance optimism.

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