HTCR - HeartCore Enterprises Stock: Volatility Does Not Create Opportunity

2023-05-31 18:07:28 ET

Summary

• When a small or micro-cap stock shows unusual volatility, at Beat Billions, we often monitor those companies to understand the reasons behind such volatility.
• HeartCore Enterprises, a Tokyo-based software development company, has experienced substantial volatility in the market in the last couple of weeks.
• HeartCore is tapping into an interesting market opportunity, one that could open many new opportunities to grow.

At Beat Billions, we closely monitor small-cap stocks to identify potential investment opportunities. When a small or micro-cap stock shows unusual volatility, we often monitor those companies to understand the reasons behind such volatility. As they say, volatility creates opportunity, and it pays to keep an eye on such unusual volatility. A few days ago, HeartCore Enterprises, Inc. ( HTCR ) caught our attention with the company's stock price wildly fluctuating from around $1.16 on May 19 to $2.40 on May 23 to $1.50 today. First-quarter earnings of HeartCore had a lot to do with the initial surge in the stock price, which reversed course in light of a new partnership announcement. As we uncovered in our research, HeartCore is tapping into an interesting market opportunity, but we are not convinced of its prospects to consider investing in HTCR today.

The Business

HeartCore Enterprises is a Tokyo-based software development company focused on digital transformation and customer experience management. The company caters to a diverse range of industries specializing in Software as a Service ((SAAS)) solutions providing a comprehensive CXM Platform, comprising marketing, sales, service, and content management systems that empower enterprises to optimize customer interactions and foster engagement. By leveraging cutting-edge design and data analytics services, HeartCore enables businesses to tailor web experiences, delivering personalized journeys for their clients. Beyond customer experience management, HeartCore has ventured into digital transformation by offering robotics process automation, process mining, and task mining allowing the digital evolution of enterprises, streamlining operations, and driving efficiency. Additionally, HeartCore offers a unique consulting service called "Go IPO," assisting private companies in getting listed on the Nasdaq.

Increasing Japanese IPOs Fuels Growth Opportunities

With the growing number of Japanese companies aiming to go public on the Nasdaq, HeartCore reported significant financial growth in the first quarter. The company's revenues surged by an impressive 283% year-over-year to $8.7 million in the first quarter of 2023 driven by the expansion of HeartCore's Go IPO business. The company expanded its Go IPO clientele by working with Libera Gaming Operations, ICheck Co., and rYojbaba, and signing them as the eighth, ninth, and tenth Go IPO clients, respectively.

Exhibit 1: HeartCore's Go IPO client wins since launch in May 2022 (excluding ICheck and rYojbaba)

The recent client wins demonstrate the company's growing reputation in the market as a trusted partner for companies seeking to go public on the Nasdaq.

The company's gross profit experienced a substantial rise of 361% to $5.6 million, with a gross margin of 64%. This expansion and stable operating expenses resulted in the company generating a net income of $1.9 million in Q1, marking a notable improvement compared to a net loss of approximately $1.6 million in the previous year. Moreover, the company has experienced growth in its global enterprise customer base, which reached a total of 916 in Q1.

New Technologies And Partnerships To Drive Growth

In recent developments, as every company leverages the development of new AI tools, HeartCore also integrated ChatGPT with its HeartCore CMS, enhancing automatic content creation for websites. This integration will provide HeartCore CMS users with the ability to generate personalized and dynamic content, enhance customer service, boost conversion rates and retention, and automate repetitive tasks.

The company has established partnerships with Works Applications and AIM Consulting to enhance its digital auditing solutions using HeartCore's DX suite of offerings. The responsibilities of internal audit departments are expanding every year, including fraud prevention, early detection of irregular processing, and preliminary investigations during initial audits. However, many companies face challenges in scaling their internal audit departments due to the specialized knowledge required in fields such as accounting, labor relations, IT, and business consulting. To address this, organizations are turning to digital transformation tools as a solution. HeartCore's digital transformation tools allow companies to overcome these barriers by providing the necessary support to execute complex auditing tasks, allowing them to achieve greater operational efficiency and mitigate risks effectively.

In a strategic move, HeartCore acquired a 51% majority stake in Sigmaways Inc., a software engineering service provider specializing in delivering IT solutions. Sigmaways brings with it a portfolio of blue-chip clients and affiliates based in the United States. The acquisition presents HeartCore with an opportunity to establish a stronger operational presence in the United States. By leveraging Sigmaways' established infrastructure and network, HeartCore gains a foothold in the U.S. market, opening doors to new business opportunities and potential partnerships. In addition to the extended client reach, the acquisition brings valuable incremental software engineering capabilities to HeartCore. These include specialized competencies in areas such as Big Data and Cloud services, API Management, Microservices architecture, and more. This strategic move significantly enhances HeartCore's ability to offer comprehensive software development services to its clients.

According to Grand View Research, the global digital transformation market was valued at $731.13 billion in 2022 and is projected to grow at a compounded annual growth rate of 26.7% from 2023 to 2030. This remarkable growth is expected to be driven by the widespread adoption of cutting-edge technologies like cloud computing, big data analytics, and Artificial Intelligence. The U.S. is expected to be one of the fastest-growing digital transformation markets through 2030.

Exhibit 2: U.S. digital transformation market size

HeartCore recently announced that Subaru Group has introduced HeartCore's Content Management System to its centralized management platform, benefiting approximately 100 Subaru websites. This highlights the adoption of HeartCore's CMS by prominent organizations and its effectiveness in managing content across multiple digital platforms.

Despite positive developments, HeartCore stock experienced a sharp decline on May 24 after disclosing a partnership agreement with Toppan Inc. The agreement, effective from May 22, 2023, aims to combine the digital marketing expertise of Toppan with HeartCore's technological capabilities in the CMS field. The partnership seeks to strengthen its presence in digital marketing and offer innovative solutions to clients by jointly developing and maintaining services in web and application development, social networking, and digital signage. Investors seem to be concerned about the profitability and growth potential of HeartCore's core business, which could be one of the main reasons behind the pessimistic market reaction to this new development.

Despite this setback, HeartCore can leverage Toppan's market presence in Asia and its established customer base, particularly in the growing digital marketing software market. According to Research & Markets, the global digital marketing software market will be valued at $264.15 billion by 2030, growing at a CAGR of 19.1% from 2022 to 2030. This market is constantly evolving with technological advancements and is driven by the increasing adoption of digital marketing software by businesses to enhance their marketing activities. Further, the cloud segment is expected to experience significant growth, helping businesses optimize cost structures and establish centralized control centers for their digital marketing campaigns. In terms of regional growth, the Asia Pacific is expected to register the highest growth, driven by the increasing popularity of social media platforms and the growing preference for e-commerce and mobile commerce.

Takeaway

HeartCore Enterprises has positioned itself as a growing small-scale player in the software development industry, focusing on CXM Platforms and Digital Transformation. The company's financial performance in Q1 was impressive, fueled by the success of its Go IPO business and strategic acquisitions such as Sigmaways which has expanded HeartCore's capabilities in delivering comprehensive software development services. Despite some promising developments, the company seems nowhere close to enjoying competitive advantages in the long run, which is a risk that we try to avoid at Beat Billions when we invest in small and micro-cap stocks. We will, however, keep a close eye on the company given that we believe the Asia-Pacific region offers HeartCore many growth opportunities to tap into.

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