2023-06-29 12:20:17 ET
Summary
- Clarivate is on track to meet or exceed its FY23 organic growth target of 2.75-3.75%, thanks to stronger subscription growth and easier year-over-year comparisons.
- The company's upgrades to the Web of Science product and incorporation of generative AI present additional growth opportunities and potential for higher structural margins.
- Achieving the FY25 targets will be the next key catalyst for stock valuation rerating.
Thesis
Clarivate ( CLVT ) is a leading player in the global information services and analytics industries, focusing on the scientific research, intellectual property, and life sciences verticals. It helps its customers safeguard their content, patents, and brands by providing them with structured information and analytics that facilitate the discovery and commercialization of new ideas. I reiterate my buy rating for CLVT, especially after the further derating of valuation to 10x EBITDA today. Unlike my previous update where the stock fell despite a strong performance, the stock seems to have digested the results and reacted positively this round when CLVT posted a strong 1Q result, in my opinion. Healthy performance was seen across revenue, EBITDA margins and EPS outperforming consensus, and management's full year 2023 guide reaffirmed. Weaker year-over-year comparisons in recurring and transactional revenue, as well as enhancements to the Web of Science product, should help organic growth re-enter the mid-single digit range by 2H23. As I have mentioned before, I think the attractive valuation upside in CLVT shares is driven in large part by the acceleration of organic revenue growth. Given the progress, I reiterate my buy rating.
Organic growth targets on track to be met
Management has reaffirmed guidance of 2.75-3.75% organic growth for FY23, and I believe CLVT is on track to meet or exceed that target thanks to stronger organic growth in subscriptions that reflects the effects of recent product updates and easier year-over-year comparisons. Given that management has signaled an expectation for a material acceleration in growth from 2Q23 to 3Q23, the risk of this earnings acceleration has been largely de-risked. In addition, CLVT upgrades to the Web of Science ((WOS)) product are generating positive sales momentum, with renewal rates increasing 350 basis points year over year to 96% and new subscriptions increasing 16% year over year in 1Q23, bolstering my confidence alongside that of management. CLVT's efforts to incorporate generative AI across the company's offerings will also be positive to the company's growth rate. Given the nature of CLVT business that deals with a lot of data, search and queries, I see tremendous value to leveraging AI here. To give just a few examples, CLVT could use AI to categorize WOS research papers and preprint articles, Derwent patents, and enable predictive analytics for clinical trials. In essence, CLVT has the potential to eliminate many man-hours of tedious work by employing artificial intelligence, which leads to higher structural margins and also resources to be reallocated to drive growth.
2H23 acceleration is key
As previously indicated, achieving mid-single digits organic growth hinges on a second-half 2023 acceleration, which carries inherent risk considering the anticipated subdued performance in the second quarter. It is important to acknowledge that the relatively limited organic revenue growth experienced in the first half of the year contributes to a more back-end weighted trajectory for organic revenue growth, thus intensifying near-term revenue uncertainty. While I anticipate that organic revenue growth will gain momentum in 2023 due to product enhancements in the WOS segment, the prospects for other segments appear less promising.
FY25 targets
The next catalyst would be CLVT achieving its FY25 targets, in my opinion, once the company reaches the guided mid-single digit growth rate. To put it in perspective, CLTV's organic growth goals for FY25 assume that the company will achieve market growth levels across all three of its business verticals. The underlying assumption here is another huge acceleration in organic growth to 6% from the current FY23 exit levels, which I believe is possible given the developments so far (using AI and product innovation at WOS).
I believe the stock will react way in advance of FY25 when CLVT continues to show progress towards this, as investors will be increasingly convinced that CLVT can achieve the targets, in which valuation will rerate.
Valuation
As we begin to value CLVT stock based on FY25 figures, I believe the upside becomes more appealing. In my model, I expect CLVT to grow at a rate of 5% in the mid-single digits (1% lower than the 6% organic growth target, to be conservative), with margins expanding as the company leverages AI and operational efficiencies. As a result, I anticipate CLVT will generate $1.3 billion in EBITDA and be valued at 13x EBITDA as the market gains confidence in the revenue and EBITDA growth trajectory.
Valuation model
M&A Risk
The company's emphasis on M&A creates risks that it may overpay, under-deliver, or improperly integrate its acquisitions. The new CEO brings added uncertainty because his or her plans will take more time to prove successful.
Conclusion
I maintain my buy rating for CLVT based on several positive factors. The stock has responded positively to a strong 1Q performance, with healthy revenue, EBITDA margins, and EPS exceeding consensus. Management's reaffirmed guidance for FY23 and the anticipated acceleration in organic growth by 2H23 further support my bullish stance. The upgrades to the Web of Science product and the incorporation of generative AI present additional growth opportunities for CLVT. Achieving the FY25 targets, particularly the mid-single digit growth rate, will be the next key catalyst for stock valuation rerating.
For further details see:
Clarivate: Business On Track To Hit Mid-Single Digits Organic Growth