First, a quick programming note. We’re making a few minor changes in our publishing schedule, which we think will better serve you and allow for streamlined operations “behind the scenes” at Cabot. Moving forward, you can expect your Cabot Small-Cap Confidential Weekly Update on Thursday, instead of Friday. As mentioned last week, Issues will be published on the first Thursday of the month, instead of the first Friday. A final change will be that on Issue weeks, we won’t publish a Weekly Update. Instead, I’ll relay relevant news via Special Bulletin.
On to the market, individual stocks continue to move around based on earnings reports and, for the most part, things appear to be quite good. Many management teams aren’t yet sticking their necks out and issuing rosy guidance for 2020, and that’s causing a few dips here and there. But you can’t blame them one bit. There’s no logical reason to overpromise now and then have to pull it back in later.
In our portfolio, we heard from a number of companies this week, and will hear from several more next week. All the details on what’s new, and upcoming, is below.
In terms of what to do now, continue to be conservative on the buy side and maintain a steady hand with stocks that are swinging around in reaction to earnings reports. That can be hard to do, but in many cases we’re better able to gauge what the next trajectory will be a few days (at least) after a company reports.
Changes This Week
Health Catalyst (HCAT) Moves to Hold
Updates
AppFolio (APPF) is flat over the last week, trading near all-time highs, and hasn’t yet given us an earnings date. We learned this week that CoStar (CSGP), a large real estate software services company that counts Apartments.com among its assets, acquired RentPath for $588 million. RentPath runs marketing websites that help link renters with spaces, while generating advertising revenue. I don’t think this will impact AppFolio at all but it’s about the only relevant news I’ve seen lately given that AppFolio management is so quiet! In the upcoming quarterly report (date TBD) look for revenue of $66.6 million (up 32%) and adjusted EPS of $0.03. HOLD
Arena Pharmaceuticals (ARNA) has had another strong showing this week (up 4%) following a 15% rally last week on the back of Fast Track designation for APD418 (for treatment of decompensated heart failure) and a major upgrade from JP Morgan. I’m not calling for the stock rip to 100, but I do think this is the emergence of green shoots of demand for shares that should help propel ARNA much higher this year. BUY
Avalara (AVLR) reported last night with revenue that was up 40% to $107.6 million (beating by $7.5 million) and adjusted EPS of -$0.03 that beat by $0.06. Some news outlets are reporting that adjusted EPS missed expectations, but Avalara has switched to a new accounting standard (ASC 606) and under those guidelines it got the beat. If you use the old guidelines (ASC 605) you get the miss (adjusted EPS of -$0.10). I’m not going to get into all the pros and cons of this switch – the company is using 606 so that’s what we’re going with.
More importantly, Avalara grew core customers by 720 to 11,960, well ahead of expectations of 300 new adds (it also has many, many more customers that don’t spend enough to qualify as “core”, which means over $3,000 within 12 months). Management gave 2020 revenue guidance of $470 million to $474 million, which is above consensus by a few million and implies just over 20% growth. I think this is conservative and sets the company up for a beat-and-raise rhythm in the year ahead. Net revenue retention was consistent at 111%.
On the downside, Avalara is going to keep investing and that’s going to pressure 2020 adjusted EPS, which is now seen closer to a loss of -$0.20 as compared to -$0.06 a short while ago. The rationale behind this is, of course, that Avalara wants to keep its foot on the gas to capture as much of the global opportunity in tax automation as it can. I agree with that. It’s sort of a land grab out there and the upfront investments to build content libraries now and get into new markets (like Latin America) will pay dividends down the road because, to pull a quote from Field of Dreams, when it comes to sales tax automation software … if you build it, they will come! On this note, Avalara is building out its international management team.
The bottom line here was a quarter that wasn’t a blowout by any stretch but was certainly solid and shows the company has a lot of potential to keep growing, as well as a lot of work to do. I like it and am not worried about the stock price moving around for a while without any net higher progress. Wise investors should be able to see the big picture and not get too caught up in the short-term stock price fluctuations. Management now moves into conference mode, with Goldman Sachs (2/13), JMP Securities (2/24), Morgan Stanley (3/2) and KeyBanc (3/3) on the docket. BUY
Earnings: Done
Cardlytics (CDLX) is still trading near all-time highs after issuing preliminary results a few weeks ago. No new news. Keep holding. HOLD
Construction Partners (ROAD) was sold last week after reporting. No new news. SOLD
Earnings: Done
Domo (DOMO) was flat this week on no major news, other than the release of its next-gen Appstore in collaboration with Amazon Web Services. HOLD
Everbridge (EVBG) will report on Tuesday. Analysts see revenue up 34% to $56.2 million and adjusted EPS of $0.04. The company just released a specialized solution to help organizations manage the impact of the coronavirus outbreak on their people, assets, customers, facilities, supply chains and brand. It will be very interesting to hear what demand for this is and hopefully management will speak to the early interest next Tuesday. We also heard that a specialized consultancy company, Control Risks, will team up with Everbridge to use the company’s platform as their delivery engine. BUY
Earnings Date: Tuesday, February 18
EverQuote (EVER) reports Monday and, given the stock’s action of late, is sure to be a closely watched event among investors. As mentioned last week, analysts have been underestimating the company because it’s so hard to value a business when new initiatives are overdelivering. As of now they’re expecting Q4 revenue to climb 71%, to $68.2 million, and adjusted EPS to improve by 80% to a loss of -$0.06. Full-year revenue is seen up 50% to $240 million and adjusted EPS loss is expected to fall to -$0.31 from -$0.55. HOLD HALF
Earnings Date: Monday, February 24
Goosehead Insurance (GSHD) is making fresh highs two weeks after delivering preliminary Q4 results that keep the bull thesis intact. No new news. BUY
Health Catalyst (HCAT) continues to be volatile and uninspiring. I don’t think we’re “done for” here, but I am moving the stock to hold given the lack of any momentum. However, I will qualify that by repeating that it just went public last July and isn’t a well-known stock yet. HOLD
Inspire (INSP) is climbing back near its recent high and reports a week from Tuesday. Analysts see revenue up 43% to $23.8 million and an adjusted EPS loss of -$0.41. We are expecting 100% Medicare coverage across the U.S. for Inspire Therapy by mid-to-late 2020. HOLD
Earnings Date: Tuesday, February 25
Luna Innovations (LUNA) jumped out to a fresh high this week as our newest stock continues the uptrend that began about a year ago. This is a tiny stock with a market cap of $273 million so please only take appropriate position sizes and recognize that with quarterly revenue under $20 million it doesn’t take much to move the needle up or down here! There’s no new news to report. Luna specializes in fiber optic sensing technologies, which have a place in communications as well as aerospace, transportation, building/construction/engineering and space travel. If it’s up your alley a reasonable-sized position could be worth it. BUY
ModelN (MODN) reported last week and I’ve kept the stock at buy as I feel the story is underappreciated by the market and the share price doesn’t reflect all that’s happening behind the curtain, which should set ModelN up for future growth. Shares have been stronger since the report and are up over 10% from last Thursday’s close. At just 3% below all-time highs and five consecutive up days there’s potential for MODN to punch out to new highs. BUY
Earnings: Done
Q2 Holdings (QTWO) will report next Wednesday. Analysts expect Q4 revenue jumped 32% and adjusted EPS grew 12%, to $0.09. No new news. I continue to like the stock. BUY
Earnings Date: Wednesday, February 19
Rapid7 (RPD) reported this week and I sent out my analysis via Special Bulletin, which recommended selling another quarter position and holding your remaining half position. Our plan continues to be to watch the stock and evaluate its reaction to earnings. So far, Rapid7 is behaving about as expected after a ho-hum quarter and reactionary dip that took it below the 200-day line. Specifically, it’s moving around in a relatively tight range. Next week will be telling. Keep holding half. HOLD HALF
Earnings: DONE
Repligen (RGEN) remains at all-time highs one week before it reports. Analysts see revenue growth of 40% in 2019 and EPS growth of 50% (to $1.03). Same as last week – I’m keeping at buy but suggest only adding smaller positions. BUY
Earnings Date: Thursday, February 20
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
