First, a quick note about next week. I’ll be out of the office Monday through Wednesday and will have limited access to a computer. During that time we’ll hear earnings reports from both Everquote (EVER) and Inspire (INSP). I expect to relay short and sweet updates on those reports but won’t go into as much detail as I normally do.
Regarding the here and now, we’re starting to see signals that we could have a market dip, which would be entirely normal given that it’s only had two small retreats since stocks began racing higher in September.
In terms of small caps, the index has remained above the high end of its 2019 trading range but hasn’t made any net new progress in a couple of months. That’s a little concerning as I’d like to see greater participation from the asset class to feel the broad market rally has legs. But, then again, when you look at how the small-cap index is constituted (a lot of small companies that aren’t all that great) it’s not hard to see why the index goes through periods of lackluster performance.
Moving on to individual stocks, as is the norm during earnings season, we’ve seen a lot of movement. For the most part it has been in the right direction for us, though we did cut Rapid7 (RPD) loose last week to lock in a 109% profit, and I am moving Repligen (RGEN) to hold today as that stock is trading lower after reporting this morning.
On the upside, Everbridge (EVBG) surged after reporting and Q2 Holdings (QTWO) tried to do the same, but was held down by today’s down market. Details on those reports are below.
In terms of what to do now the message is the same as last week: proceed cautiously and try to maintain a steady hand as these stocks swing around. Be conservative on the buy side and if you’ve made any big bets lately on positions that you’re just not feeling comfortable with then go ahead and trim them a little. It’s common for even the most experienced investors to get concerned they’ll miss out on a big move and take on too much exposure. If that rings true, just make a few incremental adjustments to get back in your comfort zone.
Of course, we’ll take it day by day and try to stay reasonably in step with the market, but more importantly in step with the stocks we’re invested in. On that note, here’s what’s new over the past week and what I’m looking forward to in the near future with each position.
Changes This Week
Everbridge (EVBG) Moves to Hold
Repligen (RGEN) Moves to Hold
Updates
AppFolio (APPF) has finally given us an earnings date, Monday, March 2. This is the most anticlimactic earnings release on the face of the planet, however. Management doesn’t take questions and doesn’t elaborate on any details. It seems to be a part of their “we are intently focused on the business” philosophy. So long as that continues to work, fine by me! Revenue is expected to climb 32% to $66.6 million while EPS likely dipped to $0.03 from $0.11 (I won’t be surprised if EPS beats, however). This all implies 2019 revenue growth accelerated to 37% from 32% in 2018 and EPS jumped 66% to $0.93 from $0.56. As usual, I expect most of the growth to have come from Value+ services. I’m always interested to hear if there is anything significant going on in the Legal vertical, which accounts for less than 10% of revenue. The stock was up another 6% since last week’s update and is now up 378% since we jumped on board. HOLD
Earnings Date: Monday, March 2
Arena Pharmaceuticals (ARNA) took a pause this week after a fierce move from 43 at the beginning of January to 54 at the end of last week. That move followed an upgrade from JP Morgan that was basically a call to attention that this is the year (2020) when we’ll start to get data on potential blockbuster drugs. On that note, management will report earnings on February 26. This is really more of a drug development and trial design update since revenue is negligible. Management will also be taking the Arena story on the road, speaking at the SVB Leerink conference on February 25 and the Cowen and Company conference on March 4. This is a long-term buy. BUY.
Earnings Date: Wednesday, February 26
Avalara (AVLR) reported last week and I covered the result (revenue up 40% to $107.6 and adjusted EPS of -$0.03) as well as 2020 guidance (revenue of $470 million to $474 million, which implies just over 20% growth), which sets the company up for a beat-and-raise rhythm in the year ahead. It wasn’t a massive quarter, but it was solid and supports the long-term growth opportunity here. The only real downside is that it will be hard for Avalara to break from an investment cycle anytime soon since it needs to keep building out its tax library and moving into other countries. That’s just part of trying to build a global leader in tax automation software. Keep your eye on the big picture. Management will soon be presenting at JMP Securities (2/24), Morgan Stanley (3/2), and KeyBanc (3/3). BUY
Earnings: Done
Cardlytics (CDLX) issued preliminary results a few weeks back and has just told us official results will be out on March 3. The stock is still near all-time highs and remains a hold. HOLD
Tuesday, March 3
Domo (DOMO) was flat again this week on no major news. We don’t have an earnings date yet but are expecting it around the second week of March. We remain in a holding pattern here until we see if management’s incremental steps tweaking the go-to-market strategy are bearing fruit. HOLD
Everbridge (EVBG) just reported and beat on both the top and bottom lines. Revenue was up 36.6% to $57.1 million while adjusted EPS of $0.05 was up from -$0.09 a year ago and beat by a penny. Management also issued 2020 guidance that implies 30% revenue growth. It’s fair to say that pretty much everything was good, which is why the stock jumped back to the all-time high of 105 after the release and is looking like it can move out above that threshold soon.
Looking at a few details, management said Critical Event Management (CEM) deals jumped by 17, more than in any prior quarter, and that it landed the largest contract ever. These deals are helping pull multi-product sales up too, which is having a positive impact on revenue per customer (up 20% to $45,500). CEM should launch in Europe this year, further expanding Everbridge’s reach in that key continent, where there is already huge potential (and speculation) for the company to capitalize on population notification legislation. A softer data point is that more customers are allowing Everbridge to identify them by name, which could be a sign that this type of software is becoming a “must-have” for companies as both a way to ensure customers, suppliers and partners that they have disaster readiness plans, and also as a way to signal to employees that there is a system in place to protect them if and when critical events occur.
Bigger picture, there’s little doubt that there is a huge opportunity in front of Everbridge and that it can become a much, much larger company. Analysts are generally positive on the growth prospects. I have noted some concerns about valuation and if, and how much, the market is already baking in bigger deals and success overseas with population alerting. But as ridiculous as it sounds, it’s hard to raise a red flag on a big-time growth story purely because of valuation these days; pure-play software leaders in big markets have traded at insane valuations for years and there’s no reason Everbridge can’t be one of them. Everbridge is still relatively small (market cap under $4 billion) and is only doing $200 million a year in revenue (in 2019) in what’s estimated as a $40 billion market. Long-term, I think it goes much, much higher.
In the immediate term, the stock is trading at or above most analyst price targets and right at all-time highs. That means buyer demand needs to dramatically overpower short-term concerns for EVBG to break out. Given that, in the context of a broad market that’s moved significantly higher lately, I suggest sitting on your current position, seeing what happens next, and looking out for the next low-risk entry point. Moving to hold. We’re up 12% over the past week and 560% since we entered the position. HOLD
Earnings: Done
EverQuote (EVER) reports this coming Monday (not last Monday, which I mistakenly implied last week). There’s no news, other than that the stock is moving higher (up 10% over the past week) and is up 270% since we jumped in this past summer. Analysts see Q4 up 71%, to $68.2 million, and adjusted EPS improving 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. But, with many new products in the mix actual results are likely to be quite different. It will be interesting! HOLD HALF
Earnings Date: Monday, February 24
BUY
Health Catalyst (HCAT)
is still in the dumps, but we finally have an earnings date of Thursday, February 27. We also just learned that the company is going to acquire Able Health, which provides subscription software that helps health care organizations deal with the burden of regulatory measures. The purchase price is $27 million, and the deal isn’t expected to have a huge impact on revenue or EPS. On that note, in the upcoming quarterly report analysts are looking for revenue growth of 16% to $41.8 million and an adjusted EPS improvement to -$0.29 from -$0.38 a year ago. For the full year 2019 revenue is seen up 33% to $150 million. One lingering question for analysts is what kind of potential (and risk) resides in the Medicity customer base (acquired in July 2018), which represents a significant renewal and/or upsell opportunity this coming summer. HOLDEarnings Date: Thursday, February 27
Inspire (INSP) reports Tuesday then moves on to the SVB Leerink Healthcare conference on Wednesday. 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) is slightly down over the past week but up roughly 9% since we entered the position on February 6. Recall that Luna specializes in fiber optic sensing technologies, which have a place in communications as well as aerospace, transportation, building/construction/engineering and space travel. It’s small and speculative, but worth a reasonably-sized position for risk tolerant investors. We don’t have an earnings report date yet. BUY
ModelN (MODN) reported two weeks ago week and remains a buy. Shares of the company, which sells revenue management software for life science and technology companies, are in the upper reaches of their recent 30 to 36 trading range and should ultimately trade much higher, pending continued success transitioning to a SaaS business model and scaling the business (i.e. delivering faster revenue growth) as a result. BUY
Earnings: Done
Q2 Holdings (QTWO) reported after the close yesterday and delivered a modest miss on revenue (up 29.2% to $86.8 million) and a huge beat on adjusted EPS (up 375% to $0.38, beating by $0.28), mostly due to income tax adjustments. Management also issued 2020 guidance of $414 million (at the midpoint), implying just over 30% growth, roughly the same as in 2019. That guidance likely leaves room to overdeliver.
Hugely significant in the quarter was that the company had two more Tier 1 wins for digital banking, including one deal with one of the 50 biggest banks in the country. That illustrates how this company continues to move “up market,” which exposes it to bigger and bigger opportunities. Acquired companies, Cloud Lending and Precision Lender, are also reportedly doing will, with Cloud landing its biggest deal ever and Precision landing two Tier 1 deals.
The conference call was held this morning at 8:30 a.m. ET and I had audio issues, which made it incredibly frustrating to listen to. I await the transcript to see what I missed. Just based on the press release and what I did hear I believe we’re good to go here and that QTWO remains a buy. There are going to be fluctuations in investments and expenses quarter to quarter that will impact earnings, and revenue from larger signings will be delayed due to implementation times. But big picture, the growth is there and the market is getting bigger as Q2 absorbs/develops more products and gets into bigger banks.
Shares of Q2 Holdings were up early and have faded at mid-day, along with the broad market. I don’t think you need to rush out and load up on shares today but do think it’s a compelling buy and one of the best long-term growth stories in our portfolio. BUY
Earnings: Done
Rapid7 (RPD) was moved to sell last Friday given the lackluster response to the earnings report and lack of follow-through/stability a few days later. I’ve felt there’s just too much downside risk in this position and that it was time to book the 109% profit on our remaining position, so we did! SOLD
Earnings: DONE
Repligen (RGEN) closed at all-time highs yesterday, then reported early this morning and shares are down roughly 8% mid-day. The headline was a top-line beat (revenue up 33.8% to $69.5 million) as well as a bottom-line beat (EPS up 5% to $0.20 beat by $0.02). That means 2019 revenue was up 39% (33% organic growth) to $270.2 million. Consistent with prior quarters Filtration and Chromatography are doing well, while gene therapy has come on strong (doubling in the quarter and now 15% of revenue).
Management issued 2020 guidance that included revenue growth of 14% to 18% ($309 million to $319 million) and adjusted EPS of $1.07 to $1.12, just slightly higher than 2019. I suspect acquisitions will boost that before the year is over. Note that management is typically quite conservative with initial guidance and last year started off with about the same projected growth rate, then delivered 39%! Like most seasoned management teams, they want to start with a gimme and go up from there. I suspect the subdued outlook is the reason for the stock’s dip today.
Because I was messing around trying to hear the Q2 Holdings earnings call I missed the Repligen earnings call, which was at 8:30 a.m. ET as well. I will review that transcript and/or replay. In the meantime, let’s move RGEN to hold and see how it digests today’s news. I suspect the stock will bounce back relatively soon but it could take the market a little time to realize that management is setting a low bar. Given how far we’ve come lately the lower-risk play is to simply sit on your current position and not try to buy the dip. Moving to hold. HOLD
Earnings: Done
