On 30/1/2020, NEA announced a downgrade to its revenue guidance. This resulted in the share price falling -29%. Fortunately, Glennon Capital avoided this loss, having sold the last of our shares at $2.97. How did we achieve this and what does it reveal about our approach to high growth stocks?
As a small companies specialist, Glennon Capital engages with all types of investment situations, whether they be roll-ups, owner-operators, deep value or high growth disruptive business models like NEA.
Different situations require different approaches. Our approach to high growth stocks is to closely monitor the key metric which will propel the share price higher in the eyes of the share market.
For example, when we first invested in NEA at a share price of $2.04, we believed that:
i.) the growth in Average Contract Value (ACV) that NEA management was targeting for FY20 (+30%) was achievable, with an upwards bias
ii.) if NEA achieved those ACV growth metrics, the share price was likely to appreciate to 10x sales, which was conservative compared to larger high growth stocks on the ASX with wholly recurring SaaS revenues such as WTC and XRO.
But in the space of 4 months, the share price shot up +90%. Taking into account all publicly available information as well as proprietary channel checks, we believed that the share price upside was no longer compelling even if the Company's ACV target was met. In fact, the share market was probably expecting a beat to ACV guidance which we had specific reservations about.
As a result, we exited the NEA and locked in a quick but healthy profit.
Today, the NEA share price has fallen to below our initial purchase price, with the stock trading at only 7.6x Enterprise Value to Sales which is a material discount to its high growth SaaS peers, while being roughly in line with smaller, lesser-quality SaaS companies on the ASX.
However, the ACV growth target for FY20 has also been downgraded by management to +17.5% due to 3 large customers leaving the Nearmap product.
At Glennon Capital, when the facts change, we change our mind. We will only re-enter NEA if we are comfortable that these 3 large customer exits will not be easily replicated across the wider customer base. In other words, we need to have confidence that NEA remains a high-quality SaaS company with an extremely large addressable market, and most importantly, customers that love and need its superior product.
If you have further questions on our approach to high growth investment situations like NEA, please contact kenny@glennon.com.au.
