EverCommerce: Why no one is talking about this market-beating SaaS name?

For nearly two years now doomsayers have been warning about an economic collapse caused by the rapidly rising interest rates and the end of the free pandemic money. A recession would impact small businesses, which are not as resilient as global enterprises.

Once again the doomsayers have been proven to be wrong as, despite the multi-decade high interest rates, the economy remains very strong. While the macro environment remains challenging, SMBs continue to do well, and software companies that serve them continue to grow nicely.

For example, EverCommerce ($EVCM) a SaaS name that digitizes SMBs in the services economy is thriving. The stock has rallied more than 50% this year and has more than doubled since December lows.

The rally is justified by the stellar financial performance. EVCM has grown rapidly while increasing its profit margins over time, meaning that its operations are getting more efficient. Its platform is unique in its space and offers great value to SMBs. It's an under-the-radar SaaS name with significant upside potential. Here's why.

Growing Demand From New And Existing Customers

EVCM is modernizing SMBs that have traditionally avoided using high-tech solutions, such as plumbing, home improvement, remodeling, and field services companies. It offers a range of software tools and services that primarily cater to three industries: home services, healthcare and fitness & wellness.

Think of EverCommerce as a toolbox that SMBs can use to run their businesses smoothly. Just like a toolbox contains different tools for different purposes, EverCommerce provides various software tools tailored to specific industries. These tools help businesses manage tasks like scheduling appointments, processing payments, marketing, and customer relationship management (CRM).

No other company offers such a comprehensive platform for small businesses in the above three verticals, making EverCommerce uniquely positioned to win from the increasing digitization of the economy. EVCM has been acquiring many small companies that solve different pain points and integrating them within its portfolio to create a comprehensive suite of software solutions for SMBs. For example, as you can see below, the company has acquired several different small companies for its healthcare vertical and is now consolidating all these companies creating comprehensive EverCommerce-branded solutions for healthcare SMBs.

The company currently has more than 685K customers, which represents a tremendous opportunity for revenue expansion through upsells and cross-sells. As you can see below, EVCM is clearly doing a good job upselling and cross-selling to existing customers as the number of customers utilizing more than one solution increased 22% in Q1 to 73K. In other words, only about 10% of customers currently use more than one solution, meaning that the company has just started to penetrate its customer base.

One of the biggest upselling opportunities is the company's payment offering. Embedded payments are a key lever to driving customer expansion because customers that use the payments solution become more sticky and use more products over time.  

Revenue Growth Coupled With Nice Operating Leverage

EVCM successfully combines revenue growth and profitability, which is very important in the current environment. In Q1, revenue grew 12.2% y/y to $161 million and beat analyst estimates. The growth was driven by a 14.6% increase in subscription revenue, a 6.3% increase in revenue from marketing technology solutions and a 37% increase in payment revenue. Subscription revenue accounts for 77% of the total, making EVCM's financials highly predictable. As you can see, the growth of marketing tech solutions revenue is pretty low as the company is facing some macro headwinds.

The payments revenue is becoming a more and more important part of EVCM's operations. The 37% growth was driven both by the increase in the payment volume and by the increase in take rates as the company increased its fees. It also increased its subscription prices in Q1 without seeing an increase in churn which underscores the mission criticality of the platform for customers.

At the same time, EVCM is scaling its operations efficiently, achieving operating leverage. In Q1, the adjusted profit jumped 39% y/y to $32 million and the adjusted profit margin increased to 19.8% from 16% a year ago thanks to disciplined spending. For example, sales and marketing expenses increased by only 2.6% y/y during the quarter while total operating expenses increased by only 5.9% y/y. The consolidation of the acquired applications drives operating and marketing leverage and this will likely continue as the consolidation continues.

EverCommerce also generates positive and increasing cash flows. In Q1, its adjusted unlevered free cash flow (aUFCF) came in at $22.3 million, up 50% y/y translating to a 13.9% aUFCF margin, up from a 10.4% margin a year ago. In EverCommerce's case, aUFCF more accurately reflects the company’s cash generation than the traditional FCF because it has significant levels of debt that impact cash flows. As of Q1, EVCM had $530 million in long-term debt and although it is certainly a significant debt load, there are no material maturities until 2028.

What About Valuation

EverCommerce has always traded at relatively low PS multiples because part of its growth has been driven by acquisitions. Excluding the positive impact of acquisitions, EverCommerce revenues grow in the low to mid-teens per year justifying the low PS multiples. At current prices of around $11.6 per share, EVCM trades at a PS ratio of 3.4x, which is a very reasonable multiple, considering its growth and profitability. If the solid financial performance continues, the PS multiple could rise up to 4x by the end of the year, translating to a stock price of $14.8, up 28% from current prices.

What Else

A recession in the US is becoming less and less likely as the economy is still very strong despite the high interest rates. Also, this year's market rebound has made a US recession even less likely to happen. The falling inflation and the overall economic resilience benefit companies that serve SMBs like EverCommerce. In other words, both the short-term and the long-term prospects of the company look bright and the stock is reasonably valued.

EVERCOMMERCE RATING

Short Term: Buy‌‌Long Term: Buy

🎯 12-Month Price Target: $18 ➡️ $14.8

I've no positions in the stocks mentioned.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.