2023-06-29 07:21:11 ET
Summary
- Weave presents an appealing growth opportunity due to its steady revenue growth and significant strides towards profitability.
- The company has seen considerable margin expansion and commands a well-capitalized balance sheet.
- Weave offers a clear plan for significant growth, all while the stock is currently trading at a modest price.
Thesis
I recommend a buy rating for Weave ( WEAV ) stock based on two key factors: the company's notable progress towards profitability and its relatively modest valuation at present.
Company Overview
Weave Communications, Inc. is a software company that specializes in providing communication and practice management solutions for small and medium-sized businesses in the healthcare industry. Founded in 2008, Weave aims to offer solutions for the way healthcare providers to interact with their patients and streamline their operations.
Weave is headquartered in Lehi, Utah, which is just a short drive from Salt Lake City, and is an area commonly known as the Silicon Slopes. The company offers a comprehensive suite of cloud-based software and hardware solutions designed to enhance patient communication, automate administrative tasks, and improve overall efficiency. The company's flagship product combines features such as two-way texting, automated appointment reminders, online scheduling, reputation management, and payment processing, all in one integrated system. By leveraging technology to improve patient engagement and optimize workflows, Weave empowers healthcare providers to deliver better experiences and outcomes.
Weave 2023 Q1 Earnings Presentation
With a customer base that spans across dental, optometry, veterinary, and other healthcare specialties, Weave serves thousands of businesses and has earned a reputation for its user-friendly interface, robust functionality, and exceptional customer support.
Weave 2023 Q1 Earnings Presentation
Weave continues to innovate and expand its offerings. Although initially established as a SaaS platform catering to dental offices, Weave has diversified its services to serve a wide range of industries. Consequently, the company's TAM has expanded significantly, with their current estimation pegged at approximately $12.5 billion. This estimation implies ample growth potential, considering their current TTM revenue of around $150 million.
Weave 2023 Q1 Earnings Presentation
The company IPO'd in November of 2021 at an initial price of $24.00 per share. However, ever since being publicly listed, Weave's shares have performed poorly.
In 2022, Weave's shares had sunk almost 90% from the IPO price. As of today, shares are still down more than 50% from the price of their initial offering.
Financials
Weave has demonstrated consistent growth in its top-line revenue, with TTM revenue reaching $148.4 million. This figure reflects a noteworthy year-over-year increase of over 20% and a three-year CAGR of 45%. Moreover, the company has made substantial strides in improving its gross margins in recent quarters. Notably, their non-GAAP gross margins have surged by 850 basis points since Q1 of 2022, indicating a positive trend in operational efficiency.
Weave 2023 Q1 Earnings Presentation
The expanding gross margins are indeed encouraging, particularly for a company striving to achieve profitability in the near future. However, it's important to note that management has acknowledged the possibility of a potentially slower rate of margin expansion in the upcoming quarters. Despite this cautious outlook, the significant improvement in gross margins has played a pivotal role in driving the company's notable progress towards achieving a positive bottom line.
Another noteworthy aspect to highlight is Weave's well-capitalized balance sheet. As of the end of Q1 2023, the company possessed a substantial amount of cash and short-term investments, totaling $112.6 million. On the other hand, their total debt amounted to $72.6 million. Taking these figures into account, Weave's balance sheet appears to be in a healthy state. It is unlikely to present any significant obstacles or hindrances to their future profitability or growth.
A significant milestone for Weave occurred in Q1 when the company reported its first positive free cash flow. Although the amount translated to just $0.01 per share, equivalent to less than $1 million in total free cash flow, it remains a noteworthy achievement. This positive free cash flow marks a step forward in Weave's financial progress and underscores their ability to generate cash from their operations.
During the most recent earnings call, Alan Taylor, Weave's CFO, made notable statements regarding the company's future free cash flow. Here is an excerpt from his comments:
We expect free cash flow to fluctuate from period to period, and we do not expect our free cash flow to be positive next quarter due to seasonal payroll factors. However, we do reiterate our commitment to achieving free cash flow exiting the year.
While Weave achieved positive free cash flow in the most recent quarter, this may not be a consistent trend in the upcoming quarters, including Q2 and beyond. However, if Weave can attain positive free cash flow for Q4 of 2023, it would signify significant progress towards full-fledged profitability.
Investors should keep a close eye on this trend as it's likely to have a direct impact on Weave's valuation. The company's ability to successfully turn the corner and generate positive free cash flow, even in the short term, will be crucial.
Valuation
Weave's financials and fundamentals signal an appealing growth opportunity. However, valuing the company accurately can be challenging due to its current unprofitable status and the relatively small amount of positive free cash flow generated.
Although it may not be a perfect 1:1 comparison, EngageSmart (NASDAQ: ESMT ) serves as an interesting comparable company for assessing Weave's potential valuation.
Currently, the market cap for Weave is ~$685 million. On the other hand, EngageSmart has a significantly higher market cap of ~$3.1 billion. EngageSmart is also GAAP profitable, while Weave is not. EngageSmart produced $325 million of TTM revenue and $22.7 million of net income.
Due to the fact that Weave is yet to produce positive net income or substantial free cash flow, comparing the two companies on an EV/Revenue basis is about the best comparison that can be made. As should be expected due to the fact that EngageSmart is profitable, they command a notably higher multiple than does Weave. However, EngageSmart's multiple could be an indication of where Weave could be valued down the road. Assuming the company continues to produce in line with guidance, I wouldn't be surprised if Weave's multiple continues to rise towards 8x as they near profitability. And assuming they successfully transition to profitability, I feel that a 10-12x multiple down the road could still be quite conservative.
From this perspective, I currently consider Weave to be fairly valued, or even slightly undervalued in the short term. However, I believe alpha generation could come from buying into Weave now and holding for the duration of their run-up to profitability. Essentially, I currently see Weave trading at a modest price for an incredibly bright future.
Catalysts
As I mentioned earlier, Weave's valuation is likely to be directly tied with the company's ability to meet management's ambitious guidance. If they are able to continue to meet or exceed guidance, they will be well on their way to commanding a share price that is significantly higher.
With this in mind, the quarterly and annual earnings presentations are going to be catalysts for Weave's stock. In particular, investors should keep an eye on Weave's 2023 Q2 free cash flow. It's likely to be negative as management previously acknowledged, but it will be noteworthy to see how much of a margin it misses by. Furthermore, if management sees a path to positive free cash flow for Q3 and/or Q4, Weave's stock could see a considerable jump. Regardless of what happens in the short term, I see Weave being a great buy for investors over the long term.
Risks
A risk that Weave continues to deal with is their customer churn. Weave's Q1 net revenue retention came in at 97% and gross revenue retention was 93%. Due to the fact that they target SMBs instead of robust enterprise clients, Weave's churn is higher than one may initially hope for. Additionally, Weave's plans don't require per-seat payment, as is custom with many software companies. This means that they aren't able to benefit from headcount growth of their clients as many other SaaS companies do.
While these metrics aren't necessarily poor, Weave will be fighting somewhat of an uphill battle moving forward, especially if net revenue retention continues to be less than 100%. This is a risk that investors should keep an eye on in the coming quarters. However, this could also become a positive if the company is able to improve these metrics.
Conclusion
Overall, Weave stands out as an attractive investment opportunity. The company has laid out a clear path to profitability and has started to turn the corner, all while trading at a modest price. Assuming Weave continues to meet or exceed guidance, they are poised for a great run. Investors should keep a close eye on free cash flow totals for the remainder of 2023, as they will continue to paint a clearer picture of the future of the company.
For further details see:
Weave: Focus On The Cash Flow