2023-05-30 03:04:53 ET
Summary
- ON24's revenue growth outlook is poor, and this explains why ONTF's shares trade at a significant discount to peers.
- The two major catalysts for ONTF, diversification by industry vertical and capitalizing on generative AI opportunities, aren't expected to have a significant impact on the company in the near term.
- It is too early to rate ON24 as a Buy now, as ONTF's shares are cheap for good reasons and it will take time for key catalysts to play out.
Elevator Pitch
I have a Hold investment rating assigned to ON24, Inc.'s ( ONTF ) shares.
With my earlier March 6, 2023 initiation article for ON24, I focused my attention on ONTF's top line and bottom line outlook.
In this latest write-up, I touch on ON24's valuations and potential re-rating catalysts. I decide to maintain a Hold rating for ONTF, as it is too early to be bullish on ON24. ONTF stock is at a fair valuation, and I expect the key catalysts for ON24 to play out over time.
ON24's Stock Price Performance And Peer Valuations
ONTF's share price has fallen by -27.7% in the last one year, while the S&P 500, a proxy for the broader market's performance, rose by +3.6% in the same time frame. ON24's last done stock price of $7.81 as of May 26, 2023 was just 13% above its 52-week low of $6.87 registered during intra-day on May 22, 2023.
The market is now valuing ON24 at 0.32 times consensus forward next twelve months' Enterprise Value-to-Revenue as per S&P Capital IQ's valuation data. Since its February 3, 2021 IPO, ONTF's mean forward Enterprise Value-to-Revenue multiple was 2.55 times, and it has even traded as high as 14.76 times forward Enterprise Value-to-Revenue in early-2021.
Peer Valuation Comparison For ONTF
Stock | Consensus Forward Next Twelve Months' Enterprise Value-to-Revenue Multiple | Consensus Current Fiscal Year Revenue Growth Rate Forecast |
ON24 | 0.32 | -14.4% |
Twilio Inc. ( TWLO ) | 2.00 | +6.7% |
Momentive Global Inc. ( MNTV ) | 2.96 | +1.5% |
PagerDuty, Inc. ( PD ) | 5.08 | +21.0% |
Sprout Social, Inc. ( SPT ) | 6.32 | +30.8% |
Source: S&P Capital IQ
As indicated in the peer comparison table presented above, ON24's consensus forward next twelve months' Enterprise Value-to-Revenue multiple is the lowest among its peers.
However, ONTF's substantial valuation discount to peers is justified by the fact that the company has the worst top line growth prospects in the peer group. While ON24 is expected to record a revenue contraction for full-year FY 2023, the market see the company's peers registering positive sales growth in the current fiscal year. Notably, ON24 revised the company's FY 2023 core platform revenue guidance downwards by -3% from $162.5 million to $158.0 million , when it announced its first quarter results in early May.
In a nutshell, it is fair that ON24's stock has underperformed the market and is valued by the market at a forward Enterprise Value-to-Revenue ratio that is much lower than that of its peers.
I discuss about potential re-rating catalysts for ONTF in the subsequent section.
The Key Catalysts For ONTF Will Take Time To Play Out
I think that there are two key catalysts for ON24 that could help the company to achieve faster top line expansion. But I don't expect these catalysts to be realized anytime soon.
ONTF's first catalyst is optimizing the company's revenue mix in terms of industry vertical exposure.
In my prior early-March initiation article for ON24, I had cautioned that "ONTF's substantial exposure to the technology sector will be a drag on its revenue for the current year." Indeed, ON24 admitted at its Q1 2023 earnings briefing on May 9 that "closing new business in the technology and manufacturing verticals, which collectively make up almost 50% of our ARR remain challenging." In other words, it is very likely that ONTF's sales concentration in specific industry verticals have led the company to reduce its FY 2023 core platform revenue guidance as mentioned in the preceding section.
But ON24 has been working hard to diversify its revenue and grow its exposure to industries with secular growth potential. One industry vertical worth noting is life sciences. As highlighted in the company's May 2023 investor presentation slides , the ARR (Annual Recurring Revenue) contribution by the life sciences industry vertical as a proportion of total core platform revenue grew from 7% in FY 2019 to 11% for FY 2022. ONTF revealed at its most recent quarterly results call in early May that its life sciences industry vertical managed to deliver ARR growth in Q1 2023 on QoQ terms unlike other industry verticals. Another industry vertical, financial services, saw its ARR contribution increase from 13% for 2019 to 17% in 2022. It is worthy of note that ON24 referred to financial services as "an important vertical" in its Q1 2023 earnings call.
Looking ahead, it is reasonable to expect that ONTF will continue to grow its ARR contribution from the life sciences and financial services verticals as part of its revenue mix optimization efforts. But the financial services and life sciences verticals accounted for less than a third, or 28%, of ON24's FY 2022 ARR, so it will take time for ONTF to reduce its reliance on the core technology and manufacturing industry verticals.
The second catalyst for ON24 relates to the company leveraging on generative AI growth opportunities.
ONTF disclosed in its first quarter results press release that it had recently launched two "generative AI capabilities, Smart Text for automated content creation and Key Moments for enhanced reporting."
But it will be premature to expect ON24's new AI offerings to have an immediate impact on the company's financial performance. When ONTF was questioned on its ability to "monetize" its "new initiatives on the AI front" at its Q1 2023 results briefing, the company stressed that its "focus is giving customers more tools", and noted that it is "still working on pricing and packaging." Based on ON24's management commentary, it appears that the company doesn't have a clear monetization model in place. As such, it is prudent to be conservative regarding the expected timeline for ONTF's AI offerings to be a significant revenue contributor.
Concluding Thoughts
In my view, ON24's shares are fairly valued, and the stock's key catalysts are less likely to be realized in the near term. Therefore, I have chosen to leave my Hold rating for ONTF unchanged.
For further details see:
ON24: Too Early To Buy