Small Cap, Part II

Now that we have a fundamental understanding of what SharpSpring is and how they operate, I want to take it a step further now. I spent some time watching Rick Carlson interview and talk about his business, I admire what he is doing and I am a proud shareholder. A few things to note as I read the investor presentation. They are approaching EBITDA and cash breakeven while growing top-line at a steady double-digit clip. The technological capabilities and agency presence are strategic and important in a sector with very large amounts of M&A. SharpSpring is also winning customers from incumbents such as HubSpot, Act-on, and Pardot.


We know SharpSpring targets digital marketing agencies with 5-50 employees with 10-100 clients simultaneously. The company helps build leads and sales, increasingly showing their ROI/value. SharpSpring is an essential backbone of the marketing stack being a B2B Marketing Automation System. Businesses are adopting Marketing Automation now, the same way they were adopting CRM in the 90s. Now, SharpSpring does not have first mover advantage, but that is ok. Rick is about 10 years late to the party with competitors starting in the early 2000s. Rick used Marketo for larger internet security companies, and the automation allowed them to personalize marketing at scale. He saw the raw power of the technology, while expensive, he wanted to bring it to businesses that were not at the enterprise level. Every business needs something like SharpSpring, bringing marketing automation down to the SMB level.


Investing in smaller cap businesses comes with volatility, as well as risks. They are very under-followed and news flow on these names are next to none, whereas Apple or Microsoft has news articles on them everyday. So it will be much more difficult to find out why SHSP is up or down 5-10% a day, we are investing in the business though so day to day fluctuations should be irrelevant to us. I think SharpSpring can grow at 30-35% top line for the next 5 years, while steadily increasing gross margins to their target of 81-83%. Below, I find these numbers to be fairly conservative and given that the business is hardly followed by analysts, I expect beats and raises and inaccurate forecasts. (Data from Koyfin.com)

Given these "estimates" from the street, we can presume that current EV/Sales is 9.6x for FY20 and 8.2x FY21 and then 7.1x FY22, I think these are rather conservative and I think they will grow revenue much faster coming out of COVID with new businesses forming.

Also, given that they are focused on cash and EBITDA breakeven it makes these multiples look that much more attractive. Analyst estimates are coming from 4 analysts.. that is not a lot.


Down below is a snippet of their top line growth over the years, I am going to focus on 2014+ because that is a better indicator of when SHSP business picked up some steam.

Revenue growth has been spotty, for sure, but as we head into the next few years coming out of COVID and SHSP playing such a dominant role in marketing automation for smaller businesses I am investing in management to take advantage of this opportunity to really establish a brand name here. Heck, the net debt/EBITDA ratio for SharpSpring is negative! Which means they have more cash than debt! They are in a very strong liquidity position.


 

Reading through the last Investor Report, a lot more positive notes are starting to stick out to me. Management believes they have attractive margins at scale, supporting 80%+ GM's and operating margins of 20%+ at scale (when the time comes). They have a long-term defensible position, given how there are significant barriers to entry in marketing automation, since they have low pricing relative to competitors they believe it puts them in a strong position to take share.


We have to keep in mind SHSP does not direct sell to the end user. They sign new agency partners, serving as a reseller. There is a stark difference with SHSP using normal SaaS metrics we would against lets say, Cloudflare. SharpSpring currently has 2,000 agency partners that work with them, they estimate the largest competitor also has roughly the same while others have only a few hundred. At the end of the day, this is a high gross margin business and that is what we want, SharpSpring's business model has built-in operational leverage that they are realizing with scale. Margins have improved over the years from 50%, to 76% in the most recent quarter! A huge positive for this business is that they do not rely on third-party licenses fees that grow with the size of the user base, everything is developed internally on the platform themselves.


SharpSpring vs HubSpot


SharpSpring is often compared to HubSpot, while flattering (management notes) and warranted, there are significant different between the two businesses. SharpSpring is young and only been in the market for 6.5 years, the other main bucks have been around a decade before that (HubSpot, Marketo (Adobe), Eloqua (Oracle), Pardot (Salesforce)). SharpSpring continues to see the same patterns these businesses did in their early years. The company is also expected to reach profitability within the next few quarters as well while building an efficient customer acquisition model.

Both are pretty impressive charts. Within 6.5 years they have an annual run rate of $30m in revenue growing top line double digits, while on their way to profitability. I am content owning a part of this business.


Fiducia


Disclosure: I am long 1,100 shares at an average price of $20.69


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