2023-03-09 10:35:56 ET
Summary
- WEAV expects a much slower pace of sales growth in FY 2023, but the company also projects narrower losses for this year.
- Weave Communications' valuations are fair in my opinion based on peer and historical comparisons.
- It will take time for WEAV to reignite revenue growth and catch up with its peers in terms of profitability; WEAV's shares are rated as a Hold for now.
Elevator Pitch
My rating for Weave Communications, Inc.'s (WEAV) shares is a Hold.
Patience is needed when it comes to WEAV's stock. Weave Communications' top line expansion has moderated as the company optimizes its go-to-market strategy, so revenue growth re-acceleration will take time. Also, even though WEAV is expecting profitability improvement in FY 2023, its gross margin for the current year should still be inferior to peers. Furthermore, Weave Communications' shares are fairly valued, implying that its stock deserves a Hold rating.
Company Description
In its press releases , WEAV refers to itself as an operator of an "all-in-one customer communication and engagement platform for small and medium-sized businesses." The company was first started in 2011 , and its shares have been traded on the New York Stock Exchange since November 11, 2021 .
The Products And Services Offered By Weave Communications' Platform
Key Events In WEAV's Corporate History
Subscription and payment processing revenue contributed 96% of Weave Communications' top line for the most recent fiscal year 2022 as indicated in its Q4 2022 results media release . WEAV earned the remaining 3% and 1% of its FY 2022 top line from hardware sales (e.g. phones) and onboarding-related services, respectively.
WEAV's 2023 Guidance Was Mixed
The forward-looking management guidance for Weave Communications, as outlined in its most recent quarterly results announcement, points to the company registering slower top line expansion, narrower losses, and positive free cash flow in the current fiscal year.
On one hand, WEAV thinks the company will report a revenue of $158 million for FY 2023 as per the mid-point of its guidance. This suggests that Weave Communications' revenue growth could potentially moderate from +22.7% in the prior year to +11.2% for this year. The company's YoY top line growth has already slowed from +24.5% in the second quarter of 2022 to +19.6% and +18.4% for Q3 2022 and Q4 2022, respectively.
The expected slowdown in Weave Communications' sales growth for FY 2023 is driven by both industry-specific and company-specific factors.
As highlighted in its 10-K filing , WEAV is a client communications platform operator which has "the majority of our revenue" generated "from small businesses." It is realistic to assume that sub-scale companies will underperform their larger counterparts in times where economic conditions are unfavorable.
Separately, Weave Communications disclosed at the company's recent Q4 2022 earnings briefing in late February that it had been "reconfiguring our go-to-market" strategy since the start of last year. More significantly, WEAV admitted that "there's going to be a fair bit of optimization" of its go-to-market approach for the current year as well. As WEAV continues to tweak its marketing set-up, it is natural that the company's sales will be impacted to some extent.
On the other hand, Weave Communications' FY 2023 normalized operating loss guidance is -$19.3 million as per the mid-point of the company's profitability guidance. If the management turns out to be right, WEAV's normalized operating loss would have narrowed considerably as compared to the company's non-GAAP adjusted loss from operations of -$31.0 million for 2022. Also, WEAV sees itself reversing from a negative free cash flow of -$15.9 million in FY 2022 to delivering positive free cash flow for FY 2023.
As mentioned in its February 2023 investor presentation, WEAV's normalized gross profit margin and EBIT margin have expanded by around +9 percentage points and +22 percentage points, respectively in the past one year between Q4 2021 and Q4 2022.
At its most recent quarterly investor call, Weave Communications stressed that it has "taken steps to rationalize our discretionary spend and streamline our operations." WEAV's expense optimization efforts have clearly paid off as evidenced by the improvement in profitability for the company in recent quarters. As such, WEAV shouldn't have any issues meeting its improved operating loss and free cash flow guidance for fiscal 2023.
WEAV's Valuation Discount Relative To Peers Is Reasonable
On the surface, it seems that Weave Communications' valuations are cheap and attractive in absolute terms. But a more detailed historical and peer valuation comparison suggests otherwise.
Peer Valuation Comparison For Weave Communications
Stock | Consensus Forward Next Twelve Months' Enterprise Value-to-Revenue Valuation Multiple | Consensus FY 2022-2025 Top Line CAGR | Consensus Current Fiscal Year Gross Profit Margin |
Weave Communications | 1.82 | +13.8% | 66.5% |
LivePerson, Inc. ( LPSN ) | 2.14 | +20.6% | 71.6% |
RingCentral, Inc. ( RNG ) | 2.25 | +11.1% | 78.6% |
Source: S&P Capital IQ
The consensus forward next twelve months' Enterprise Value-to-Revenue valuation multiple for WEAV had compressed substantially from the stock's historical peak of 8.04 times recorded in January last year to 1.82 times currently as per S&P Capital IQ data. But the valuation de-rating for Weave Communications in the past one year is fair, since WEAV's top line growth has decelerated from +74.7% and +45.0% for FY 2020 and FY 2021, respectively to +22.7% in FY 2022.
In terms of peer valuations, Weave Communications' expected revenue CAGR for the FY 2022-2025 period isn't as fast as LPSN, while the consensus gross margin estimate for WEAV in this year is lower than both LivePerson and RingCentral. This suggests that it is understandable why the market has assigned a relatively lower valuation multiple to WEAV as compared to its peers.
Closing Thoughts
Weave Communications shares aren't undervalued nor overvalued, and the company's near term financial outlook is mixed. As such, WEAV should be rated as a Hold, rather than a Buy or a Sell.
For further details see:
Weave Communications: Patience Is Needed