Description

Weave Communications (WEAV) is a SaaS business trading at a decidedly un-SaaS multiple.  The company makes communications software for specific vertical markets such as dentists, veterinarians, optometrists, and other small medical practices.  These are resilient businesses that hold up well in a challenged economy thus giving predictability to Weave’s revenue stream.  The company is growing revenue at a 20% clip and is on the edge of profitability, both of which I think are inflection points as the word about the company gets into the market.  Its stock trades at 2x sales, which is very cheap for a SaaS company with its revenue growth rate.  It has $120 million in net cash on the balance sheet which equals 20% of its market cap so it is well capitalized for any macroeconomic scenario.  It has a $550 million market cap and trades liquidly on the NASDAQ. 

WEAV went public at the end of 2021 at $20 per share sporting a 50% growth rate and negative operating income of $31 million.  Revenue was slowing as the company heavily relied upon in-person trade shows for leads which dried up during the pandemic.  The CEO at the time had a growth at all costs mentality which became out of favor during the 2022 technology meltdown and a new CEO came in a year ago with a profitability agenda.  Brett White was the CFO and COO of MindBody (MB) before coming to Weave as CEO.  MindBody was sold to Vista Equity Partners for 7.6x sales in 2019.  While at MindBody Brett executed a similar business plan bringing the company to profitability before selling to Vista.   

Revenue bottomed out at an 18.4% growth rate in the December 2022 quarter and has been accelerating each quarter since then with a 20.2% growth rate in the recently reported September quarter.  Profitability has improved from a $10m operating loss in the June 2022 quarter to just a $1.8m loss in the September quarter.  The company will be profitable likely in the December quarter.  Gross margins are expanding rapidly from 60.6% in the June 2022 quarter to 68.7% in the most recent quarter.  This is partially due to a mix shift to more profitable subscription revenue and from an increase in subscription margins due to greater scale. Subscription margins currently stand at 77.2% (up from 73.1% in the June 2022 quarter) and can likely get to 80% in the near term.  I see operating profitability as a catalyst for the shares as many investors are precluded from investing in unprofitable companies.    

Weave’s products help its clients manage their communications with their customers.  These capabilities include text reminders for appointments, screen pops with customer information when customers call in to the office, text-to-pay billing including payments software, etc.  The platform includes phones, analytics, schedules, forms, SMS text, reviews, patient data, insurance verification, and much more.  Weave’s platform integrates with a slew of dental, veterinary, and optometrist practice management systems for easy collaboration.  Weave is the leading player in this space with the best platform, which has won many industry awards.  The company likes to call out the number of “boomerang customers” it has each quarter which are customers that tried another system due to lower prices yet returned to Weave as the other systems didn’t have the same ease of use and breadth of functionality.  Weave’s payments business is growing at twice the rate of its other products and is approaching 10% of revenue, at which point the company is going to start disclosing it separately. 

One area that Weave has not perfected yet which is coming online soon is multi-location functionality.  This is centralized capability and analytics for multi-location customer groups.  There are a lot of these groups out there as private equity and hospital systems have been buying out smaller offices and centralizing functionality for them.  These capabilities will add a big chunk of the market to Weave for incremental growth. 

New management understands the beat and raise game in the market and guides conservatively each quarter.  WEAV is one of the cheapest SaaS stocks out there trading at just 2x sales on its way to becoming a rule of 40 company.  Most SaaS competitors trade at 5x sales and above and do not have the resilient customer base that Weave has.  Even in a recession people will still see their dentists and veterinarians so this customer base is shielded from a weakening economy.  There is a lot of operating leverage in the business, and we forecast EBITDA margins to grow to 27.5% by 2026 resulting in a valuation of 1.4x sales, 5.1x EBITDA, and 7.7x earnings at its current stock price.  At a 20x EBITDA multiple that would result in a $28.50 stock price or a 255% return from current levels.  The company might also be bought along the way as it is an attractive franchise for a private equity player to scoop up.  

What are the risks of investing in WEAV?  The company has a lot of cash which might be used in an ill-advised acquisition although I think a small tuck-in acquisition is more likely if any is done at all.  Although 2x sales is pretty cheap relative to other SaaS peers, valuations might come down across the sector and might make WEAV not such a relative bargain.  The economic situation could worsen and even put WEAV’s resilient customer base in a tougher position, slowing sales for the company.  The labor market could tighten further making it hard for Weave to find salespeople and other employees it needs to execute its business plan.

All information provided herein should not be deemed as a recommendation to buy or sell securities. The opinions expressed are my own and may differ from the opinions of my employer. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions, and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed are solely for general informational purposes. Public comments posted on this site are not selected, amended, deleted or sorted in any way. Content posted by third-parties is not attributable to myself.  

Catalyst

Continued beat and raise quarters will keep the stock price moving up and to the right.  The company could also get acquired by a strategic or financial buyer.