2023-06-30 09:37:20 ET
Summary
- MarketWise is now down nearly 80% since going public, which presents a compelling buying opportunity.
- The company demonstrated surprisingly strong profitability in the latest earnings, as operating leverage continues to improve.
- The headwinds should continue to ease as the market sentiment has been improving in the past few months.
- Current valuation is extremely discounted compared to peers, which should translate to meaningful upside potential.
Investment Thesis
MarketWise (MKTW) is now down over 30% since my previous coverage last year, where I mentioned the company's execution and monetization being major issues. While the share price has declined significantly, its overall backdrop has actually improved.
The company is now demonstrating much stronger bottom-line growth via more disciplined spending. Monetization should also improve as headwinds continue to ease. The current valuation is also extremely discounted and offers an attractive risk-to-reward ratio. I believe the massive drop now presents a compelling buying opportunity for long-term investors.
Strong Profitability
MarketWise is a US-based finance company that provides investing-related tools to self-directed investors across the globe. The company currently owns 12 brands that offer 160 products such as software and research to over 15 million subscribers. Notable brands include InvestorPlace, TradeSmith, and Stansberry Research. Due to the unfavorable market sentiment in the past year, the company's conversion rate and paid subscriber count continue to be weak, as investors are becoming increasingly impatient with the market.
While the top line was being impacted, the bottom line continue to grow exponentially, as the company demonstrated strong operating leverage. For the first quarter , the company reported revenue of $126.2 million, down 7.7% YoY (year over year) compared to $136.8 million. Billings also decreased 28.5% from $136 million to $97.2 million. This was largely driven by the decline in paid subscribers, which was down 14.5% from 909,000 to 777,000, as the market remains volatile. Total subscribers grew 6.6% from 15.4 million to 16.5 million, as free products continue to see upbeat momentum.
As mentioned above, the bottom line was the highlight of the quarter. Thanks to improved operating leverage, operating expenses as a percentage of sales declined from 87.3% to 75.8%. This is largely attributed to the drop in S&M (sales and marketing) expenses, which declined 28.6% from $68.2 million to $48.7 million. The lower spending resulted in the net income up 32.9% YoY from $23 million to $30.6 million. The net income margin expanded 740 basis points from 16.8% to 24.2%. Operating cash flow also grew 262% from $1.1 million to $3.9 million. The balance sheet remains extremely strong with $161.5 million in cash and only $40 million in debt.
Easing Headwinds
As mentioned above, MarketWise has been impacted meaningfully by unfavorable market conditions. Last year it was high inflation and rising interest rates and earlier this year, it was the unexpected banking crisis.
However, the headwind should ease moving forward as market sentiment has improved substantially in the past two months. There were no surprising events as of late while inflation continued to trend down steadily. This alongside the enthusiasm around AI has sent the market rallying. As shown in the chart below, the market is now in a state of extreme greed. This should drive a lot of individual investors back to the market, which increases the demand for MarketWise's products. I believe the easing headwind should put the company in a much better spot for growth in the second half.
Cheap Valuation
After the massive drop in share price, MarketWise's valuation looks extremely cheap. The company is currently trading at an fwd PE ratio of just 10.6x, which is significantly discounted compared to other research companies such as Gartner ( IT ) and FactSet Research ( FDS ). The two companies have an average fwd PE ratio of 30x, which represents a premium of 183%.
They deserve a premium as their offerings are mostly B2B (business to business), which offers much greater stability, but this magnitude of the valuation gap seems excessive. I believe the company's fair value should be somewhere around 20x PE. The company should trade at an above-market valuation due to its capital-light and highly profitable business, but it will likely trade below peers due to its higher cyclicality and market exposure.
Risk
While the recent economic data remains resilient, I believe an economic downturn continues to be a major risk for MarketWise. With the Federal Reserve planning to raise interest rates by two more times this year, the chances of a recession happening continue to increase. This is indicated by the inverted yield curve, which generally predicts a recession correctly. If it were to happen, the market will likely plummet, which should impact the company's demand substantially. Due to the company's sensitivity to market sentiment, I believe this is something to keep an eye on moving forward.
Investors Takeaway
MarketWise presents a more compelling investment opportunity after the massive decline in share price. The company demonstrated surprisingly strong bottom-line growth in its latest earnings as operating leverage continues to improve. While the top line was impacted by the volatile market, the headwind should ease as market sentiment continue to rebound in recent months. The current valuation is also discounted for a highly profitable and capital-light business. I believe there should be ample upside potential once growth reaccelerates amid easing headwinds. Therefore I am upgrading the company from a hold to a buy.
For further details see:
MarketWise: Improving Profitability And Easing Headwinds (Rating Upgrade)