Based on my current outlook and analysis of AvePoint (NASDAQ:AVPT), I recommend a buy rating. I expect growth to accelerate back to historical levels as we move past the current macroeconomic pressures. In my opinion, the long-term growth trajectory remains sound as AVPT continues to take advantage of the digital transformation tailwind, especially with the increasing attention paid to adopting AI.
AVPT develops SaaS solutions to migrate, manage, and protect data and IT infrastructure. In essence, AVPT helps businesses and organizations in their transition to a digital work environment. The long-term outlook for AVPT is that it is riding on the digital transformation secular trend, and with more and more profound digital tools coming into the market (like AI), AVPT’s value proposition will continue to increase. Using verified market research numbers as a benchmark to size the TAM, it is expected to be worth $1.5 billion in 2030, which is a 17% CAGR from 2021.
AVPT is one of those stocks that benefit from a strong long-term secular trend, but the market doesn’t care. The stock price has gotten decimated from $18 to $3.40 over less than 2 years because of the weak macro environment, rising rates, and constant headline news of companies delaying large projects (like digital transformation). The stock has since risen back to $6.60. Now, I think the market is gradually shifting its focus back to the medium-term recovery potential as we are moving towards FY24, where I think the economy should start to show signs of recovery. I think this was effectively conveyed in the 2Q23 call when management talked about the macro environment showing signs of stabilization. The small and medium-sized business [SMB] market, where the firm is gaining traction thanks to channel scaling, was singled out for its stabilization. The fact that SMBs, which tend to suffer disproportionately during any economic downturn, are beginning to show signs of stability is encouraging. This suggests to me that the economy is doing much better than the mainstream media would have you believe. Most importantly, prolonged sales cycles and careful deal analysis did not have any further effect over the past two quarters, suggesting that even on the enterprise level, things seem to be improving.
I think AI has been a major catalyst impacting many businesses recently, compelling them to go digital or risk falling behind the competition. This plays well into AVPT expertise, in my opinion. In order to make the most of AI, customers must first implement internal data organization, security, and governance controls to use that data to support new AI use cases. Remember that AVPT’s core competence lies in data management, governance, and security. Hence, I believe they are in the best position to help businesses get through this phase. With this position in the transformation phase comes a plethora of business opportunities, such as assisting clients in modernizing, controlling, and applying resilience to their data management procedures. This should eventually lead to larger deal sizes for AVPT as it becomes a larger part of customers’ digital transformation processes (i.e., it’s easier to get 1 vendor to do everything as it touches various parts of the business than to get multiple vendors to work together, which increases the chances of messing things up). There are already two instances of this happening, as mentioned in the:
- Goldman Sachs Communacopia & Technology Conference, where management highlighted that a government agency has engaged AVPT to assist in creating an in-house LLM due to privacy and other concerns
- 2Q23 earnings call, where management highlighted use cases of its new Cloud Records solution
And importantly, their journey with us will continue as we’re in talks to extend our governance capabilities to improve their use of homegrown business workflows, as well as our cloud records product in the Resilience Suite to drive a more comprehensive approach to information management. 2Q23 call
My last bullish point for AVPT is that the business is finding success in transitioning from its capital- and resource-heavy direct selling go-to-market model to indirect selling, which leverages channel sales. 61% of incremental ARR now originates from the channel, up from 56% in the first quarter. In my opinion, this bodes well for the business margin profile as it eases up the S&M component in the P&L while at the same time increasing its distribution capacity to reach more SMBs.
I believe AVPT will accelerate its revenue growth back to its historical 20+% level as we eventually get past current macro challenges. My fundamental view is that AVPT is going to grow alongside the industry, which is expected to grow in the high teens for the foreseeable future. There is hardly any reason to believe growth will slow down or mature at this stage if we believe that digital transformation is a necessity. AVPT is currently trading at 3.5x fwd revenue, which is its historical average, and I expect this valuation to hold its ground as AVPT continues to accelerate its growth back to historical levels.
Risk and final thoughts
As shown in recent quarters, the implementation of digital transformation is important but can be delayed. Reality could be contrary to my expectations, as businesses are willing to postpone their digital transformation initiatives despite the risk of falling behind peers. This would impact the expected growth recovery of AVPT, which could hurt valuation as the market has rerated valuation up from 2x fwd revenue to 3.5x fwd revenue, which I take as an indication they are increasing expectations.
Nonetheless, I recommend a buy rating for AVPT based on its potential for accelerated growth driven by the ongoing digital transformation trend. Despite recent challenges in the macroeconomic environment, AVPT’s focus on digital solutions positions it well to benefit from the increasing adoption of AI and the need for data management, security, and governance. Signs of stabilization in the SMB market and improved enterprise-level performance also bode well for the expected growth recovery. The rising importance of AI further supports AVPT’s expertise in data management. AVPT’s transition to an indirect selling model through channel sales is also a positive factor, improving its margin profile and expanding its reach.