TTGT - TechTarget - Not On My Target List

2023-04-27 18:37:00 ET

Summary

• TechTarget, Inc. has come to life in recent years.
• The company has seen a severe growth slowdown in 2022, and guides for substantial revenue and profit declines in 2023.
• Fundamental valuation support is hard to find, as I fail to have conviction on the TechTarget, Inc. business model as well.

In December, I concluded that it was not yet time to place shares of TechTarget, Inc. (TTGT) on the target list. This came as the share price performance had outpaced the operating performance during the pandemic.

While shares did see a retreat at the time in 2022, some weakness was seen in the business as well, making it too early for bottom fishing.

The Business - A Recap

TechTarget, Inc. describes itself as a data driven marketing analytics and sales enablement solution provider. IT vendors should be able to fill their pipelines though its services, in essence being a marketplace function between such IT vendors and IT procurement professionals.

The company owns a wide range of more than 100 niche websites which attract 20 million members, both on an organic and paid basis. At these websites, IT professionals can read articles, provide reviews, write white papers and connect with these IT vendors, in an attempt to create local systems here.

The company has grown to a revenue base of around $150 million between 2016 and 2020, as EBITDA has risen to about $50 million over the same period of time. Sales growth, margin expansion and share buybacks pushed shares up from just $2 in 2017 to a high at $60 at the start of 2021. That was equivalent to an 8 times sales and 60 times earnings multiple, far too steep of a valuation to get involved, and far too demanding for a non-revolutionary business.

Shares saw huge momentum at the $60 mark and even traded around the $100 mark on various occasions later in 2021, but when I picked up coverage in December of last year, shares had fallen to $43 per share.

In the meantime the company has seen impressive 2021 results, as reported early in 2022. Sales were up 77% to $263 million with the run rate exceeding $300 million, albeit in part aided by some M&A action. The company posted adjusted earnings of $72 million, equal to $2.22 per share.

While I was happy to adjust for amortization charges, and some other one-time items, that was not the case for a steep $38 million stock-based compensation ("SBC") expense, equal to about a dollar after taxes. Hence, realistic earnings only topped a dollar per share, a huge valuation.

The company guided for 2022 sales to rise to $310-$315 million, with EBITDA seen up to $120-$125 million, up from a $105 million number in 2021. Even as realistic earnings might increase a bit, valuations were still far too demanding. This was certainly the case as the company trimmed the outlook throughout the year, seeing full year sales at just $295 million by the third quarter, with EBITDA still seen around $122 million.

With realistic earnings coming around $1.50 per share, the resulting 30 times earnings multiple was still too steep for me. This was certainly the case as the company furthermore operated with a modest net debt load of $70 million, as the company announced layoffs of 5% of its workforce in December, suggesting that no quick recovery was in sight.

While a 60% pullback was huge, the momentum enjoyed before was great as well, making me still very cautious in December.

A Further Retreat

Since December, TechTarget, Inc. shares have fallen from $43 to $34 at the moment of writing, marking another 20% retreat in the time span of around four months, with shares trading close to their lows here.

In February, the company posted its 2022 results with full year revenues up 13% to $297.5 million, coming in ahead of the lowered guidance at the time of the third quarter results. The company posted full year adjusted earnings of $2.56 per share, yet GAAP earnings only came in at $1.30 per share, as the vast majority of the reconciliation was due to stock-based compensation expenses, with realistic earnings otherwise coming in around $1.50 per share.

Fourth quarter revenues were down 5% to $73.0 million, with GAAP earnings only coming in at $0.23 per share, in part due to a restructuring charge taken. The company saw a modest increase in net debt, the result of share buybacks.

The issues related with the 2023 outlook, as the midpoint of the revenue guidance only comes in around $260 million, suggesting double digit sales declines. Moreover, adjusted EBITDA is only seen at a midpoint of $90 million, which compares to a $122 million number in 2022. That $32 million deleverage is equal to about a dollar (on a pre-tax basis), suggesting that realistic earnings are likely largely evaporated, perhaps only seen around half a dollar.

It is the guidance which makes me very cautious about TechTarget, Inc., as the fundamental support is hard to find. I am not convinced on the long-term longevity of this business model as well. This makes TechTarget, Inc. still a very easy avoid for me here.

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