TTGT - TechTarget: Business Has Secular Trend And Valuation Has Been Heavily Beaten Down

2023-10-20 04:01:26 ET

Summary

• Investors with medium-term holding power should benefit from investing in TTGT as the stock is expected to see positive traction in FY25.
• TTGT operates a network of websites and channels that provide data-driven insights to B2B tech sellers.
• Despite recent financial challenges, TTGT has positive free cash flow and a sound balance sheet, and its value proposition is expected to grow over time.

Summary

I am recommending a buy rating for TechTarget (TTGT), as I believe the upside is appealing if one has medium-term holding power (needs to hold through FY24, which could be rangebound due to the weak sentiment). As the market shifts focus to FY25, where TTGT is expected to show growth recovery, the stock should start to see positive traction.

Business

TTGT operates a network of websites, webinars, and virtual event channels that each focus on a specific IT sector. The end goal is to supply enterprise technology firms' sales and marketing departments with data driven by buyers' intentions to buy. To rephrase, TTGT provides an effective means for B2B tech sellers to locate and engage with influential IT decision-makers. TTGT's business model benefits both the company and its clients. Free educational content is created and edited by vendors and IT market professionals for TTGT to aid business professionals in making informed purchasing decisions. In exchange, TTGT is given permission to share search data with third parties. TTGT provides first-party purchase intent insights to technology companies all over the world by analyzing their customers' content consumption habits.

Financials/Valuation

TTGT's recent performance is suffering from the pullback in ad spend by companies due to the uncertain macroeconomic outlook, where businesses are holding up cash on their balance sheets to ensure they have enough liquidity to keep the lights on. Over the past 3 quarters, revenue has continued to demonstrate accelerating negative growth of -5.1%, -16.2%, and -25.9%. The drop in revenue had a direct impact on earnings, where the company saw its EBIT decline from 19% in 2Q22 to just $0.7 million in 2Q23. TTGT, however, continued to generate positive FCF in the meantime, albeit mostly due to an increase in stock-based compensation (2Q23 SBC as a percentage of sales was 12.7% while FCF margin was 10.3%). Thankfully, the business balance sheet is in alright shape, where the company only has $140 million in net debt, or ~2.5x FY23e EBITDA.

Based on my view of the business, TTGT should see flat revenue growth in FY24 as it recovers from the weak FY23, driven by businesses gradually returning to spending on ads. Post-FY24, TTGT should be on track to recover to its historical growth rate of ~10%. In terms of earnings margin, I expect flat margins for FY24, followed by a modest recovery in FY25, as the business incrementally grows margins back to the FY22 level of 29%. Due to the near-term flattish growth expectations, I do not expect TTGT to see any near-term upside catalyst for multiples revaluation. Currently, the stock is trading at 18x NTM PE, and I expect the valuation to remain at this level until at least 2H24, where attention shifts from flattish near-term growth (FY24) to growth recovery in FY25. Nonetheless, based on my growth expectations, TTGT does not require multiples to re-rate much higher to make the upside attractive, as the stock and valuation have been beaten down heavily over the past 2 years.

Comments

The business model of TTGT is underpinned by various secular trends, including the increasing emphasis on privacy concerns and regulatory measures, as well as the adoption of automation and data-driven approaches to enhance sales and marketing operations.

The utilization of first-party purchase intent data obtained from a consent-based audience is considered to be the primary distinguishing factor that gives TTGT a competitive edge over its competitors. The utilization of first-party data is increasingly crucial due to the anticipated persistence of regulatory pressures aimed at safeguarding user data. The prevailing patterns in North America, Europe, and other continents indicate a notable departure from the reliance on third-party data. It can be argued that possessing the appropriate collection of data is of utmost importance in order to achieve success in the forthcoming decade. Therefore, the value of buyer intent data is expected to increase over time. Historically, when enterprises prioritized offline channels, possessing access to various types of data such as credit card sales history and search history conferred a significant competitive edge. Nevertheless, with the progression into an increasingly digital epoch, the aforementioned data will become fundamental prerequisites (or potentially inconsequential due to universal possession). The possession of a substantial volume of first-party data is expected to emerge as a prominent source of competitive advantage in an environment where the acquisition of third-party data is increasingly challenging. The acquisition of this data holds great importance, as it enables sales teams to strategically prioritize specific accounts for targeted marketing and outreach efforts. In this context, I believe the value proposition of TTGT will experience significant growth over time. This assertion is based on my personal belief. It is important to acknowledge that TTGT derives advantages from the acquisition of first-party data through permission-based methods, as opposed to relying on third-party solutions. Given Google's announced plan to phase out cookies , I anticipate that TTGT will experience significant advantages, as this development is poised to significantly disrupt the digital advertising sector. Consequently, the business model of numerous competitors of TTGT, who heavily rely on Google's third-party data, may be adversely affected. Numerous competitors may find it necessary to revise their strategies in response to the depletion of cookie data, thereby creating an opportunity for TTGT to gain market share.

TTGT's Priority Engine facilitates the modernization of sales and marketing functions within businesses through the utilization of first-party data. To provide contextual information, it should be noted that ABM platforms facilitate the implementation of Account-Based Marketing [ABM] programs on a large scale. These platforms empower sales and marketing teams to effectively execute various aspects of ABM, such as account selection, planning, engagement, and reporting. This feature assists customers in enhancing the precision of their client targeting efforts. It is my belief that TTGT possesses a product of considerable competitiveness, which has garnered recognition within the industry . Consequently, this should enable TTGT to secure a portion of the market as the utilization of third-party data becomes increasingly constrained.

One potential drawback that investors may scrutinize regarding TTGT is its limited level of brand advertising exposure. I respectfully hold a contrasting viewpoint, asserting that a TTGT's B2B model exhibits superior qualities. Consumer branding operates within a highly competitive market, characterized by a substantial online inventory, resulting in significant pricing pressures. Conversely, within the B2B technology sector, one could argue that there is a noticeable lack of reliable content resources available. As long as TTGT is capable of delivering high-quality content, which it is able to do so by leveraging its first-party data, it will have the ability to establish a premium pricing strategy. Therefore, I hold a favorable outlook regarding this business-to-business exposure, as it enhances the resilience of the business model compared to the consumer-oriented aspect of brand advertising.

"It's basically opposite business model, consumer branding is basically unlimited, web inventory, the kind of low prices. In the B2B world, in the IT space, specifically, we benefit from a scarcity of inventory." Source: 2Q23 earnings

Risk & Conclusion

In my assessment, TTGT Priority Engine faces the risk of falling behind as more advanced technologies and solutions emerge in the near future, unless it introduces fresh innovations. It's worth mentioning that TechTarget's investment in research and development is comparatively modest, accounting for less than 5% of its total revenue dedicated to product development, whereas many of the typical fast growth software sector companies allocate much more towards R&D (for instance Atlassian.

I recommend a buy rating for TTGT, with an appealing upside potential for investors with a medium-term horizon extending through FY24. Despite expected near-term challenges and flat growth in FY24 due to weakened sentiment, I believe TTGT is poised for recovery in FY25 as the market refocuses on its growth potential. TechTarget's business model revolves around supplying B2B tech sellers with valuable data derived from buyer intentions, making it a mutually beneficial arrangement. Although recent financial performance was affected by a dip in ad spend, TTGT maintained positive free cash flow and has a sound balance sheet with low net debt.

The company's future prospects are underpinned by secular trends in data privacy, automation, and data-driven approaches. The increasing importance of first-party purchase intent data positions TTGT favorably, especially in a shifting landscape with the decline of third-party data. I believe TTGT's value proposition will grow significantly over time, particularly as Google phases out cookies.

In light of these factors, TTGT is poised for a recovery, making it an attractive investment opportunity, given the significant valuation adjustment it has experienced in recent years. Nonetheless, it's essential for TTGT to innovate and stay ahead of evolving technologies to secure its competitive edge in the long term.

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