BUY HOLD SELL – Nuix (ASX: NXL)
Nuix (ASX: NXL) was the biggest float of 2020 and soared more than 50% on its first day. Investment banks couldn’t get enough of it and many missed out on their desired allocation. Some speculated that it was a function of the improving macro picture combined with a lack of desirable floats in 2020 that drove the heightened interest. So, what is it doing now?
On Monday, it was announced NXL would be added to the ASX 200 as part of the March quarterly rebalance. Not always a good thing as Henry reminded me, more people looking under the hood can sometimes be detrimental. That said, the index inclusion does typically lead to short term strength as “passive” funds, like ETFs, or any index matching fund, have to sell the stocks that drop out of their benchmark index and buy the stocks that get included.
That may have helped NXL rise ~4% on Monday but the stock is still down more than 35% since its half-year results. The market wasn’t pleased as they appeared to miss prospectus expectations. Joint underwriter Morgan Stanley believed the price reaction was too severe, adding that the disappointing result now lifts the risk profile of its full-year earnings. To rebuff those comments, CEO Rod Vawdrey said its sales pipeline remained strong and US government deals would bounce back in the June quarter. Vawdrey was quoted saying, “the fourth quarter is always the strongest”.
- Topline revenue was down 4%, at $85.3m, while annual contract value (ACV) for the 12 months ending 31 December was up only 3%, to $162m. The majority of NXL’s revenue comes out of the US, with currency headwinds named as a reason for the revenue setback
- Management reaffirmed guidance saying they expected to hit full-year ACV of $200m and pro forma earnings (EBITDA) of $63.6m
The initial brainwave for the company came from the idea to make emails searchable, which does not sound that ground-breaking. It easily surpassed that ambition with the glamorous aim now of, ‘finding truth in a digital world’, but what does that actually mean? NXL produces software which is used to manage cybersecurity threats, as well as risk and compliance obligations, and to investigate fraud. NXL claims it can make any digital data searchable in near real time – at a speed and scale that is unmatched, turning any data into intelligence.
The graphic from its half year results sheds more light on what it actually does. If you work from the bottom up, you can see how it is essentially a filter of information from multiple sources, file types, and locations. Law firms are some of its biggest clients and it’s easy to see why. If you’re creating a discovery file and sifting through 1000s of documents, this would be a lifesaver.
The 15-year-old company has a proprietary data-processing engine that users reportedly swear by, and touts an impressive list of customers including high profile law firms, advisory firms, the Australian Taxation Office, Australian Securities and Investments Commission and the US Department of Homeland Security.
- Floated at $1.7bn, market cap now at $1.85bn.
- ROE of 7.3% isn’t that juicy but it’s expected to lift to 15.1% in FY3. Its peer in FLC sits on -6.9%.
- No EPS or revenue forecasts for the coming financial year. EPS growth is anticipated to outpace revenue growth in FY2 and FY3.
- A PE of 97x is rather modest for a growth company, meaning it actually has earnings, unlike many of the other high flying tech stocks in the market. As HUM (the old FXL) found out, that isn’t always good for the share price.
- One broker with a BUY recommendation.
- NXL is trading at a 45.9% discount to the broker’s target price and a 77% discount to intrinsic value.
WHAT SORT OF INVESTMENT IS NXL?
NXL is a growth play in the rapidly-evolving investigative analytics and intelligence software market. Ankura senior managing director Shannon Sedgwick was recently quoted saying the “field of forensic, investigative and cybersecurity, in which Nuix operates, was guaranteed to grow.” Not often you see someone in the financial game attach their name to a guarantee. The catch is that NXL’s total addressable market is not going to be that big, estimated at $27bn. It is not like Xero, which is working to have its product adopted by everyone. That said, doing one small thing well can be very profitable. There is also scope for the business to move further into the healthcare, professional services and banking space, as digital forensics and data simplification requirements expand. M&A opportunities are also speculated. It has a very sticky customer base which is a good sign, with renewals predicted to make up 85% of its full-year revenue and new business anticipated to add the other 15%. The business is also looking to expand into new verticals, progress its shift to a SaaS business model (carries some short-term risk) and extend the functionality of its platform to drive future growth. Economies of scale are also leading to improved margins, as ~80% of the operating cost base being employee-related expenses.
Joint underwriter Morgan Stanley labelled the interim report as ‘disappointing’. It did, however, talk about confidence on the back of opportunities that have been mentioned above. Expansion into new verticals, shift to SaaS and M&A prospects. Added share price weakness should be considered an opportunity and sees a ‘considerably’ stronger second half. The CEO of NXL has also commented on the companies skew to the second half. Target price of 1075c implies upside of 84.7%.
The stock listed at 531c and jumped 50% on the day, continued to climb to a high of 1116c mid-January then dropped 32% on results. Since then, it has moved off the bottom, out of oversold territory, currently trading ~570c. Since the low, it has tested the 600c level but never closed above it, with some still licking their wounds from the results shock. There is a gap/window on the chart created by the drop post results, which is open between 700-900c. Often times these windows act as a vacuum, drawing the price action higher until the gap is tested and/or closed. The test for NXL will come at the bottom of the window, around 600c. If that price point can be cleared, then there is the potential for the price action to be sucked all the way back up to the 870-900c region.
A lot of blue given the float at the end of last year. Joint underwriter Macquarie reportedly cashed in ~$575m worth of shares into the float. Currently holds 30.15%.
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