2023-04-06 11:15:51 ET
Summary
- The CLVT business is widely adopted in the industry and has proven to be enduring and difficult to replace.
- CLVT should be relatively recession-proof given its mission-critical solutions and the customer base.
- CLVT's addressable market is not big, and the historical growth rate is very slow.
- In my opinion, CLVT's plans to broaden its product offerings and allocate resources towards growth lack persuasiveness. Instead, I believe the company should maintain its focus on existing business lines and distribute profits to its shareholders.
Clarivate Plc ( CLVT ) is a leading provider of worldwide information, analytics, and workflow solutions across various domains such as Academia & Government, Life Sciences & Healthcare, and Intellectual Property. Despite their excellent reputation in the industry and top-notch products, the company's stock price has not performed well compared to the SP500 over the last three years. In the following paragraphs, I will share my opinions on CLVT, including its strengths and weaknesses.
CLVT has high-quality business lines
CLVT has a series of established and stable business segments with a good reputation and long-term customer relationships. They possess a best-in-class product portfolio consisting of renowned market-leading brands and products such as Web of Science™, Derwent™, Cortellis™, CompuMark™, Innography™, ProQuest™, ExLibris™, and Innovative. Having catered to more than 50,000 customers in around 180 countries, including the top 30 pharmaceutical companies and top 20 biotech and medtech companies, as of December 31, 2022, CLVT has established a strong presence in the industry.
CLVT generated around $2,659.8 in revenues for the year that concluded on December 31, 2022. The majority of this revenue (77.5%) was generated through recurring revenues using a subscription-based model and re-occurring revenue transactions. Additionally, CLVT has achieved annual renewal rates exceeding 90% in each of the past three years. Furthermore, for the year ending December 31, 2022, the largest customers of CLVT accounted for only 7% of the total revenues.
CLVT's sticky business model helps it during economic downturns
In general, CLVT provides content and databases to its clients for research purposes. The nature of its business appears to be very resilient due to the recurring demand for its mission-critical solutions. Its clientele includes government agencies, universities, top pharmaceutical companies, and research and development departments, among others. These customers have consistent budgets and operate their businesses independently of economic cycles. Based on the chart below, all three segments have outperformed the market during the previous two downturns, including the Dotcom bubble and the global financial crisis. Additionally, CLVT's business model is highly profitable, with gross profit margins exceeding 60%, and its operating margin continues to improve to 10%+.
CLVT's TAM may not be as big as it claims to be
CLVT has been highlighting the promising prospects of the innovation market, which has ample room for expansion, thanks to rising research funding, the proliferation of healthcare data, and an increase in patent and trademark filings. Nevertheless, I believe the former management has been excessively touting the size of the market opportunities available to CLVT. The new CEO has stated in recent calls :
Today, we deliver approximately $2.6 billion of revenue in a serviceable, addressable market approaching $25 billion. In the past, we have emphasized the total addressable market of more than $100 billion. However, in the near term, I will focus on how we are performing in the markets we serve.
It has been acknowledged by the new CEO that the previous goal of a 100 billion dollar addressable market is likely not achievable in the near term. With the actual total addressable market being only 25 billion dollars, there are limited compelling reasons to anticipate substantial business growth for CLVT.
CLVT's acquisition strategy is not convincing, while the management still focuses on growth
Although CLVT has doubled its revenue since 2020, this growth is largely attributable to its multiple large acquisitions, including Decision Resources (valued at $950 million), Hanlim IPS, and ProQuest (valued at $5.3 billion). However, if we examine the revenue on a per-share basis, it only increased from $3.56 in 2019 to $3.93 in 2022. With respect to the ProQuest acquisition, I remain unconvinced. Many of their products are not widely used, and the academic content and software markets are highly competitive due to the emergence of open-source publishers and social platforms such as ResearchGate.
My other concern pertains to the ambiguous growth strategy adopted by CLVT. Although the management has expressed its intention to transform the company from a data-centric solutions provider to an insights-driven strategic partner, the process involved is challenging and expensive. It will necessitate the investment of significant development resources in the creation of tools and software to enable efficient use of data, such as the recently launched Brand Landscape Analyzer and Alma library management solution. While this approach is promising, the recruitment of new engineers to facilitate it will come at a high cost. Even if CLVT manages to sell the new tools and software, the anticipated growth rate would be from 3% to 6%, which, given the current macroeconomic environment where the fed rate is 5%, is not a wise investment decision, in my opinion.
Bottom Line
CLVT already has a substantial market share monopoly. The company's products and services are relied upon by 96% of the top 50 R&D companies, 100% of the top pharma, MedTech, and biotech companies, and 99% of the top 400 universities. Due to this, CLVT appears to be an established and mature company rather than a growth tech company, with limited space to add new customers. In my opinion, CLVT should focus on solidifying its product offerings and returning cash flow to shareholders instead of continuing to borrow debt and issue shares. Although the CLVT business is durable and sustainable, the current EV/Sales ratio of 4.5x and EV/EBITDA ratio of 12.5x, combined with 3-5% annual growth, can only be considered fairly valued, in my opinion.
For further details see:
Clarivate: Challenges To Deliver High Growth