NEW - TOP IDEAS: With record bookings, growing Managed Service revenue streams and new cost reductions being implemented, the path to profitably is becoming clear for Pivotree Inc. (TSXV: PVT), making the stock’s price attractive today.

Pivotree was a pass for Investorfile’s coverage shortly after the Company’s IPO at C$8.50 at the end of 2020. It was not that we did not like Pivotree’s Management and business model (quite the contrary); at that time, the valuation of the stock was way too rich based on the information we assessed. That said, with two years of operating information and several acquisitions later, the share price looks attractive at current levels and hence the stock is appointed to Investorfile’s list of Top Ideas as a small cap value investment opportunity.

Based in Mississauga Ontario, Pivotree Inc. (TSXV: PVT – C$3.50) designs, builds and manages digital platforms in Commerce, Data Management, and Supply Chain for major retail and branded manufacturers throughout the world. As described by the Company, the goal is to empower what they call a "Frictionless Commerce” experience for their clients’ customers across their entire buyer journey -- from finding their item, to buying it, to getting it, all the while building trust in the experience.

Pivotree says converging technologies are driving up consumers' expectations and creating increased pressure on major brands to find new and better ways to connect with their customers. In its best form, frictionless commerce reduces stress on the system, anticipates customers' needs, and delivers personalized products to customers efficiently at optimal prices.

Pivotree is focused on the digital commerce transformations for the needs of large enterprises for Business-to-Consumer (B2C) and Business-to-Business (B2B) interactions, both of which have complex digital ecosystems. Pivotree’s portfolio of products, managed and professional services helps provide B2B and B2C digital businesses with true end-to-end service to manage complex digital commerce platforms, along with ongoing service support from strategic planning through product selection, deployment and hosting, to data and supply chain management.

Today, Pivotree has expanded and consolidated its service solution offering across three key distinct business units -- Commerce, Data Management and Supply Chain -- while providing core digital solutions through the three aforementioned business units using engineered and/or assembled products.

The Company says each of its solutions may start with products that they assemble using reliable and reputable e-commerce, data management platforms, or warehouse and order management systems. These run on an enterprise-grade infrastructure that is then customized to meet a variety of client needs, situations, and budgets. Then, the Company provides the technical skills necessary to enable the effective use of technologies, combined with the business context, to leverage a solution to solve its clients' business challenges. Pivotree assembled product categories include: Cyber threat protect and mitigation services ("Pivotree Protect”), Web Inclusion and cart/site error corrective services ("Pivotree Fix”), Business Operation service for SaaS based commerce ("Next Gen Support”) and Cloud-managed environments with embedded cost reduction services ("Cloud Optimizer”).

Just as important, Pivotree also fill the gaps in available technology with the Company’s own intellectual property to reduce the barriers to adoption. As such, Pivotree has continued to bolster its product offering in an effort to become a North American leader of frictionless commerce enablement solutions, through organic investments and acquisitions. Today, the Company’s engineered products include: Pivotree DIVE – Data Automation and Onboarding services powered by ML/AL, Pivrotree Connect – API Management and Integration service, Pivotree Control Tower – Observability, Assurance and Analytics dashboards, and Pivotree Store Accelerator – Quick start deployments for eCommerce and marketplace. Adding to its product offering will continue to be a focus for Pivotree.

Today, the Company says its customers include 170 major retail and branded manufacturers operating throughout the world. From its customer base, Pivotree generates revenue from the sale of its managed and/or professional services across its three business units. The Company says its Managed Services (MS) are sold on the basis of minimum monthly committed business through annual and multiyear contracts most having an automatic renewal schedule and representing recurring revenue to Pivotree. Professional Services (PS) is revenue earned on specific projects, which includes product sales with discrete deliverables. Pivotree’s also just launched Commerce-as-a-Service (CaaS), a new packaged services offering, applied as a modern subscription model, aims at eliminating heavy upfront costs as well as the need for capital investment approvals for its customers.

At Investorfile, we believe that the Company’s most recent operating results highlight the momentum in Pivotree’s business operations. Revenue in Q3 2022 was C$24.6 million and the Company said it had record bookings of $19.2 million. Q3 revenue represents 54% year-over-year growth, with 8.5% of growth being organic, according to Pivotree. Year-to-date revenues are C$75.5 million, which indicates the Company is on pace to be near C$100 million in revenue when it reports annual results for 2022. Recurring revenues from the Company’s MS represents 45% of total revenues. Blended, gross margins from both MS and PS are around 45%.

Looking at their third quarter numbers there are some key positive trends occurring in Pivotree’s business operations. Firstly, an increase in revenue penetration of MS being derived from Pivotree’s PS customers. Such conversion drives a higher revenue mix to MS, which leads to higher margins and longer-term customer retention. Secondly, the Company says that multi-category expansion is also occurring, which implies more success in cross-selling within its customer base (which then leads to more revenue growth).

We note as of Q3 2022, Pivotree was not operating at EBITDA positive. That said there is a commitment to do so. The Company’s CEO has publicly stated in his last letter to shareholders that it expects Pivotree to be at positive adjusted EBITDA in Q4 of 2022 and begin delivering operational cash flow in 2023. This path to profitability should be a major milestone for the stock’s valuation going forward.

Last reported the Company had C$13.8 million in cash on its balance sheet and no debt.

Despite executing on its revenue growth strategy to date, the market capitalization of Pivotree had dropped significantly throughout 2022, like so many other small cap tech stocks. With that said, the market valuation of this Digital Commerce Company is attractive based on its current Enterprise Value (EV)/Sales ratio at 0.80 (at C$100 million revenues). Therefore, as its stands today, Pivotree represents a very good small cap investment opportunity. This is based on what we believe is a high-quality technology growth story on the cusp of profitability with a Company that has strong balance sheet. As such, Investorfile is recommending value-wise small cap investors to purchase Pivotree’ shares at the current trading price. We are also suggesting the stock could be accumulated up to a share price C$4.20. As always, investors in growth stocks should have a minimum investment horizon of 24 months to realize the capital appreciation potential.

Looking forward, we see Pivotree executing on its stated Land and Expand strategy (multi-category expansion) with its existing customers, while having further penetration of its Digital products and MS revenue streams. The Company also has the capacity for some more M&A. (Pivotree closed on two successful acquisitions in 2021).

Given recent financial trends, we see Pivotree organic growth rates continuing at about 10% annually and the Company closing on at least one more acquisition (with C$10 million revenues) by the end of 2024. Given near-term commitment to operate with positive EBITDA, we feel the Company can exit 2024 on a C$130 million revenue run rate while generating adjusted EBITDA margins close to 10%.

Based on the above growth assumptions exiting 2024, adjusted EBITDA could reach C$13 million annually. With that said, Pivotree currently trades at a valuation just over 6 times EV/EBITDA. Today, if a small cap investor begins to accumulate shares of Pivotree up to C$4.20 (with an average cost base C$3.85 per share), the investor is paying a valuation level that is less than 7 times EV/EBITDA. Based on this scenario, for an investment in a $100 million plus revenue growth company, Investorfile considers buying Pivotree a value-wise small cap investment opportunity. We note that today, the Company’s shares trade well below the consensus of the 12-month analysts' stock price targets at C$7.50 per share.

Pivotree pre-announced record bookings of $21 million for Q4 2022. These sales bookings will be realized as revenues throughout 2023.

Pivotree has 26.8 million outstanding on a fully diluted basis. Combined, Management and Directors own about 25% of the Company’s stock.

Company website: www.pivotree.com

Author Ownership Disclosure: TSXV: PVT – Yes

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