INTA - Intapp: Good Fundamental Performance But Valuation Is Too High

2023-06-22 12:46:39 ET

Summary

• Intapp has shown strong performance and growth, but its current valuation of 8x forward revenue makes it a less attractive investment.
• The company benefits from resilient demand and long-term tailwinds due to its focus on vertical markets and specialized platform offerings.
• Risks include potential disruption from horizontal application companies and exposure to the banking and financial services sector.
• Read on for why we are downgrading this from a Buy to a Hold.

Overview

Intapp ( INTA ) develops cloud-based, AI-enhanced software for the business and finance sectors. INTA platform uses proprietary AI to facilitate the maintenance of existing clientele and the development of new connections while simultaneously facilitating the smooth execution of deals and engagements. I originally pitched to buy the stock with a price target of $33.16 at 4.3x forward revenue valuation. Now that the stock has far exceeded my price target, and valuation is now at 8x, I am shifting my recommendation to a hold. However, I would continue to track the stock for buying opportunities as the business performed very well so far. Simply by looking at the recent update, INTA reported very strong ARR growth which led to an increase in FY23 guidance for the third time this year. Fifty new customers were also added during the quarter, as usual, and continued cross-selling and upselling contributed to even more annualized rate of growth in average revenue per user. There was also no reported sales friction in the quarter due to banking volatility, which is a positive sign, according to the management team. Fundamentally, I am very positive about the business, but at 8x valuation, it is hard to underwrite this investment.

Resilient demand is attractive in current market environment

A healthy pipeline has been steadily growing this year, and management does not expect the macro environment to be a detriment to the total sales opportunity. As a matter of fact, I anticipate INTA continues to enjoy long-term tailwinds from COVID that prompted significant technological shifts within its vertical end markets. Given that approximately 35% of INTA's recurring revenue comes from clients in the banking and financial services industries, it came as a bigger surprise that INTA was not impacted by the regional bank issues in March. This also highlights the resilience of INTA's customer base as the company has been spared the upheaval because it does not sell to financial institutions that accept deposits. In my opinion, INTA's end markets should continue to be relatively immune to economic downturns because the legal sector provides relatively stable demand throughout the business cycle, and furthermore, financial service providers are priced according to operating fees rather than transaction volume (effectively removing the cyclicality unless the customer goes bust).

All in all, I believe INTA's ability to continue driving demand in this tough operating environment has attracted the attention of many investors that are looking for such characteristics. This is especially in the TMT sector where a lot of companies are facing headwinds from customer budget cuts or delays in project implementation. Hence, I expect to see valuation continuing to get support from this dynamic.

Expect growth to continue just as it is

INTA's sales pitch typically centers around the company's DealCloud and compliance services as a means of attracting new clients. INTA uses this to compete with both in-house solutions and single-product and enterprise-level, cross-industry CRM suppliers. This is where I anticipate INTA to outperform the competition thanks to the vertical specialty of its platform (providing far more than a point solution vendor). As DealCloud becomes the exclusive cloud-based brand on the platform and INTA continues to improve the platform via M&A, I expect the product value proposition of INTA to broaden, setting it apart from other point solution providers and facilitating sustained growth.

Valuation

Based on my updated investment thesis, I believe INTA is no longer an attractive investment due to the higher valuation that it is trading at. I have no change in my views that INTA can maintain a healthy growth rate in the near term, reaching $500 million in revenue in FY25 (after incorporating FY23 guidance). This is based on my belief that the TAM is massive, and that INTA has numerous growth levers at its disposal to extend its growth runway. However, I think valuation has already priced in these positive momentums and shareholders now face the risk of multiple reversion to mean (5.3x forward revenue).

Risks

Disruption from horizontal application companies

Customer relationship management is central to the needs of these end markets, along with other specialized applications. Intapp's market share could be threatened if competitors such as Salesforce ( CRM ) and Microsoft ( MSFT ) invest sufficiently in vertical specialization of their platforms and form the appropriate partnerships with system integrators to add industry expertise on implementation.

Risk from banking and finance exposure

Banking and Financial Services exposure. With a mid-30s percentage of recurring revenue attributed to BFS clients, we are watching for potential reverberations from recent regional bank failures, however, management stated that they have not yet seen any effect on the sales cycles from this.

Conclusion

While INTA has shown strong performance and growth, exceeding expectations in terms of ARR and customer acquisition, I am shifting my recommendation to a hold due to the significantly higher valuation the stock is currently trading at. The business fundamentals remain positive, and INTA is well-positioned to benefit from long-term tailwinds and resilient demand in its vertical markets. However, the current valuation already incorporates these positive factors, and there is a risk of multiple reversion to mean.

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