2023-10-12 08:53:50 ET
Summary
- ONTF's shares have become more attractively valued, following the pullback in its stock price for the past couple of months.
- I see ON24's revenue visibility and profitability improving, which demands a valuation re-rating.
- My rating for ONTF is revised to a Buy, considering its top-line outlook, profitability prospects, and valuations.
Elevator Pitch
I rate ON24, Inc. ( ONTF ) stock as a Buy now. ONTF's revenue visibility has become better with an increase in the proportion of multi-year client agreements, and the company achieved positive earnings in the most recent quarter. Nevertheless, ONTF's shares have still performed poorly in recent months, and its current price-to-sales multiple isn't that far from its historical low. These factors make ON24 a more attractive investment candidate now.
Share Price Correction Has Made ONTF More Appealing
I did a comparison of ON24 with its peers and identified potential catalysts for the stock in my prior May 30, 2023 update . With that article, I shared my views that "it is too early to rate ON24 as a Buy now", and the recent pullback in ONTF's shares suggests that I was right.
Following the publication of my previous write-up at the end of May this year, ON24's stock price declined by -16.2% as per Seeking Alpha price data. During the same time period, the S&P 500 went up by +3.6%. This means that ONTF shares did badly in both absolute and relative terms for the past four and a half months.
Notably, ON24's YoY revenue decline worsened from -10.5% in Q4 2022 to -11.2% and -12.8% (for Q1 2023 and Q2 2023 (source: S&P Capital IQ ), respectively. I mentioned in my end-May article that "ONTF's sales concentration in specific industry verticals" which are more economically sensitive like manufacturing and technology might have a negative impact on the company's top line. This helps to explain the correction in ON24's share price to some extent.
However, it is important to highlight that ONTF's valuations have become much more enticing, with the company's shares trading lower in recent months. ON24 currently trades at a price-to-sales valuation multiple of 1.97 times, which is just 16% higher than the stock's all-time historical trough price-to-sales ratio of 1.70 times (source: S&P Capital IQ ). More significantly, ONTF's current valuations aren't reflective of the company's improved revenue visibility and profitability outlook, which I will detail in the next two sections of this article.
Revenue Visibility
In a tough economic environment, a company which can improve its revenue visibility should expect both its business and stock to perform reasonably well, and ON24 fits the bill.
At its most recent second quarter results briefing , ON24 highlighted that the proportion of its Annual Recurring Revenue or ARR contributed by contracts with a duration of more than one year increased from 41% in 2022 to the "mid-40s" percent level in Q2 2023. This represents the highest level of ARR contribution for multi-year agreements in ONTF's history. In 2021, multi-year contracts accounted for a much lower 35% of ON24's ARR. Separately, the percentage of ONTF's clients who are using at least two of its products also increased from 35% in 2021 to 36% in 2022.
As the economy's outlook becomes more challenging, a growing number of corporates will think about terminating the services of certain suppliers and vendors, or at least switching to cheaper packages offered by the same suppliers and vendors. This is where ON24 has a clear edge over the company's competitors. Having a reasonably large percentage of customers that are on multi-year agreements implies that ONTF will have a fewer number of clients whose contracts are up for renewal in the near term when economic conditions are still unfavorable. Also, ON24's relationships with a meaningful number (more than a third) of customers are pretty "sticky" because they use more than one of the company's products.
Improved top-line visibility gives ON24 the confidence to expect better financial results going forward. ONTF guided at its second quarter investor call that it sees "improvement in our performance" for 2H 2023 vis-a-vis Q2 2023 as a result of more favorable "cohort dynamics (multi-product clients and contract terms that extend for over a year)" that "alleviates some of the pressure on larger customer down sells."
Profitability Outlook
I am of the opinion that the market hasn't given sufficient credit to ONTF for the company's positive profitability prospects.
ON24 turned around from a non-GAAP adjusted net loss per share of -$0.14 in the second quarter of last year to generate a positive normalized EPS of +$0.04 for Q2 2023. Moving forward, ONTF is expecting higher positive earnings for full-year FY 2024 as compared to FY 2023, and the company's goal is to register normalized EBITDA margins above 10% in the intermediate to long term.
At its Q2 results call, ONTF explained that "a streamlined organization and a lower cost structure which will deliver significant operating leverage" will enable the company to meet its profitability targets for the near term and the long run.
As an indication of the progress that ON24 has made in optimizing its expenses, ONTF has disclosed that the company's aggregate operating expenses on an annualized basis are projected to be $50 million lower in Q3 2023 as compared to that for Q2 2022.
Closing Thoughts
There is a mismatch between ON24's valuations and expectations of improved financial performance. This makes the stock a Buy in my view.
For further details see:
ON24 Looks More Attractive Now (Rating Upgrade)