2023-06-22 06:52:08 ET
Summary
- You may recall I wrote an article on the Norwegian business Kahoot! a few months back. The company has seen interesting performance since my last article.
- I don't view the company as materially better, however, than it was a few months back.
- I'm giving you my update for the later parts of 2023 - but I don't really see Kahoot! as massively attractive from here on out either.
Dear readers/followers,
Kahoot! ( OTCPK:KHOTF ) isn't a company that I'm currently invested in - nor do I see it as likely that I'll invest in the near future. However, growth investors and people more friendly towards the whole sector of tech growth are more likely to be positive on what the company offers here.
Since my last article, Kahoot! has seen growth and outperformance - quite a bit of it, in fact. However, it is still very little next to the significant drops from its heights of over $12/share back in tech-froth mania.
Also, if you invested in the IPO, you're still significantly in the negative, because the company does not pay a yield, and it's significantly below that IPO level. So anyone being positive about Kahoot! here - well, keep that in mind.
Nonetheless, I'm happy to review Kahoot! here and give you my updated thesis for what I sometimes view as an, at least, interesting prospect .
It's definitely not one of the worst tech companies.
Why?
Because it's profitable!
Kahoot! - Looking into 1Q23 and forward
So, one of the big things that differentiates Kahoot! from other companies in its sector is that it is a profitable business. In the 10 years they've been around, they've managed something that most if you look at the actual total number of companies in this sector, have not managed. That is to turn a profit.
The company's idea is appealing and at the same time, difficult. Education and Edtech overall is a very difficult sector to make a profit in, because much of your customer base is in the education sector - usually public, with intricate processes in order to become a customer. It's an easy sector to get a lot of subscribers in, provided those subscriptions are free. Kahoot! has seen this as well, because growing active accounts has not been a difficult thing to do.
It's also interesting to see how quickly a company chooses to focus on positive EBITDA and earnings once those are available. In previous presentations, most of their material has focused on active accounts. Now, the company's focus has shifted.
Because the company has positive EBITDA, even if it's barely-positive GAAP EPS, it now becomes easier to "sell" this investment. The company reports double-digit growth in revenues for the first quarter this year, with 1.35M paying subscribers. That's something I can finally say is impressive for this business.
What's more - positive FCF. $7.8M of it. The company is actually making money for its shareholders now, and has cash and equivalents of nearly $90M on the books.
The advantages and positives of the platform is not something I'll go too heavily into in this article - we covered this in previous pieces - but to summarize, the company's business idea is to power engaged learning for all - commercial players, education players, and consumers. This sort of focus, and at a cost that is digestible even for most consumers, is a good recipe for profit here - as long as the company keeps its OpEx under control.
And for the time being, the company manages this. OpEx is still fairly high, and the revenue to the net isn't exactly "clean".
So to say or to characterize the company's situation as anything that's comparable to a massively profitable company in any "normal" sector - that's not really the case here. The company is breaking even and getting a small profit. That's it.
A quick glance at the company's customer portfolio, because it's attractive.
The company has really managed to deliver solid customers on the commercial side that are likely to drive at least stability in income/revenues for as long as the company is able to maintain its momentum.
Its forward focal areas have to do with further learning engagement, both on the corporate and consumer side, but also developing full-on learning platforms for schools and educators - which is where I'm starting to be a bit dubious. The company is also starting to offer premium content through its Academy and marketplace programs. The company has been FCF and EBITDA positive for some time - but the last year was the first time they were clearly net-income positive, which is really what we should care about. That the company is scaleable is not in question. We have proof that the company can not only grow revenues but grow earnings as a result of revenue growth.
What interests me is if the company can scale up its revenues without scaling up operating costs - and there seem to be very solid indications here that this is indeed possible.
So, with that out of the way, what should we be looking at or expecting from the company? Because there are some valuation-related concerns here - the company because of its recent bout of valuation growth, is actually rather high.
The expectations are for Kahoot! to become massively profitable by 2027. And by massive, I mean a trend like this.
EPS estimates go only until 2025E today. So there's as much uncertainty on an implied basis as you might expect from a company such as this.
Questions to this company relate to things you might expect here - we're talking things like how the company will implement Artificial Intelligence. This remains a relatively unclear trend, as I see it.
What I'm more interested in is the post-COVID-19 digital engagement dropoff which we've seen from most sectors, as trends across various fields normalize. The company is seeing this as well - a lot is being talked about on delivering on new value propositions and functionality, but the fact is that user engagement is dropping off. It's this general drop-off, that to me seems contrary to the company's current expectations to where things are going in a difficult market situation - meaning inflation, interest rates, and so on.
To put it simply.
So across the board, using the trend lines we see, but not taking from -- for granted that we necessarily, on the like-for-like product offering, will have the same trends going forward, and therefore, continuing to invest in better products, better services and more value, regardless whether you use Kahoot! once a month, once a week or several times a day in the time to come.
(Source: Kahoot! 1Q23 Earnings Call)
I consider that assumption to be based on too little fact for me to take it as a solid forecast for the next few years. I consider it likely that the company's current trend may in fact be a bit of a "peak", and that we will either normalize or even drop in the next few years - likely flatten out, not drop. The company does provide engaging and good products, and I see this more positively than I do with most tech-based companies - but I see more issues going forward than most analysts seem to.
This is what leads me to my current set of assumptions and my valuation target for the company.
Kahoot! - The valuation is no longer appealing, even with a profit.
So, the main point that I want to make is that I don't consider Kahoot! to be appealingly valued based on its forward earnings potential. Plenty of analysts and models consider this company rather significantly undervalued - but I am obviously not one of them.
When it comes to how analysts view the company, we see that the company has gone well above where analysts view it as appealingly valued. However, I will be raising my PT in this article , based on profitability and outlook for the company. But that raise will be to a level of about 13 NOK per share based on a 100% SOTP-valuation where view the company as being valued.
Analysts differ somewhat here. We have 6 analysts following Kahoot, going as low as 20 NOK and as high as 29 NOk, with an average of around 25 NOK. That means that the current price is well above both in terms of mean targets, as well as the highest target analysts give the company. Out of 6 analysts, only 1 has the company at a "BUY" despite it being above his or her target.
To put it succinctly, I don't see the potential or appealing upside available here if we look at the next few years - or it's too uncertain.
Kahoot! is at a great valuation based on forward metrics - that is, if you believe the company is worth 90-100x P/E.
Now, I obviously do not consider this valid. In fact, I consider it excessive. This would make the company worth over 8x Sales, 25x+ EBITDA and over 8x revenues, as well as a leveraged free cash flow yield on a forward basis of a whopping 2.5%. Not something I'd be interested in investing in. Any premium or higher valuation for this business is predicated on assuming high premiums - or growth rates that I consider to be unsuitable or unlikely for any business - but definitely for this business.
I have been burned in education/edtech before - and I'm not about to repeat that mistake. That is why I retain a very conservative valuation, but raising my target for the company Kahoot! to 13 NOK per share, based on better results, positive earnings, and higher expectations. Some of these are solid and likely - others are not.
You could, if you want, still use a tech-sort of analysis. if you recall, across tech/growth, analysts tend to value companies at a multiple or percentage to revenues , which compared to other tech businesses with success would imply undervaluation here, even now after the company is up more than 20% in a relatively short time.
However, I view this method as too flawed and too insecure to actually give you a price target based on this. We don't have ZIRP, we don't have the same circumstances that we had when the tech mania, similar to the dot-com bubble reigned.
For that reason, here is my target for the company and my currently relevant thesis.
Thesis
- Kahoot! is an interesting and market-dominating learning and engagement business, with very impressive top-line trends. However, like many tech businesses, it has failed to generate a single cent of positive operating income and net income - which means that I do not view it as a successful or investable business at this price.
- Even after the latest increase in valuation, it only serves to slightly increase my price target based on good earnings trends.
- I could be convinced to, as of profitability pay a SOTP-100% value at 13 NOK/share , around half of the current share price, provided trajectories continue to show positive momentum in 2023. This is up from 10 NOK per share back in my previous article.
- For now, though, this company remains a "HOLD", and I would not buy it here.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
The company fulfills none of my investment criteria. It's a "HOLD".
For further details see:
Kahoot!: Time To Revisit The (Potential) Upside