EverCommerce has solid growth prospects

This year everyone is talking about the great market rebound. Inflation has peaked, and the economy has proven to be more resilient than originally expected so the market is soaring. It never stays down for long after all. But there are some under-the-radar names that actually started to rally in late 2022 after investors found out that they were too cheap to ignore. Software company for SMBs EverCommerce ($EVCM) is one of these names. EVCM has soared 80% in just two months and recouped nearly half of its total losses.

EVCM is a newly listed name that most investors are not familiar with. Yet, it offers unique and powerful software solutions that modernize hundreds of thousands of small businesses in the services economy. It's in the right place at the right time as its cloud-based offering helps SMBs streamline their operations and grow their businesses in the digital age.

The company's not immune to current economic uncertainty though. In the most recent quarter, it missed analyst estimates on the top and bottom lines and lowered its full-year guidance as its SMB customers became more defensive amid inflationary pressures and macro disruptions. But these short-term disruptions don't change the company's long-term growth outlook. EVCM is going to win big by helping traditional small businesses digitize their operations and become more competitive.

Digitizing Businesses That Have Been Left Behind 👨‍🔧🧑‍🏭

EverCommerce is a niche cloud provider for companies that have historically been ignored by major software firms. Most larger software companies have overlooked SMBs in micro verticals like landscaping, plumbing, and remodeling, assuming that they’re not worth their attention, or that they cannot afford their products, leaving them with limited options for managing their businesses.

EVCM has filled this market gap by developing an end-to-end cloud platform that helps these types of businesses modernize their operations and offer an enjoyable customer experience. In fact, it has created three similar cloud-based platforms -- each one of them designed to meet the specific needs of each vertical.

As you can see below, EverPro is the platform for businesses in the home services micro verticals like security & alarm, HVAC, roofing, etc. EverHealth is the platform for health professionals and EverWell caters to businesses in the fitness and wellness verticals. These are all very small businesses that used to use primarily manual processes to manage their operations because there were no software solutions tailored to meet their needs.

After years of building the above platforms through acquisitions and in-house R&D, EVCM has now created the most advanced end-to-end SaaS solutions for businesses with a total addressable market of over $160 billion in North America alone. These cloud-based solutions allow customers to manage their businesses, including e-commerce, customer relationship management (CRM), and payment processing. These tools are integrated into a single platform, making it easy for customers to use and manage their data.

There's no direct competitor that has built such an advanced digital ecosystem for these types of businesses leaving EVCM alone to capture market share. As of Q3, it had over 600K customers across the three main verticals. Once a customer onboards, there are significant upsell and cross-sell opportunities. The most common upsell is EVCM's payment functionality. It not only allows the company to increase its revenue from each customer but also makes them more sticky.

Over 70K customers used more than one solution in Q3, up 30% y/y, which shows that the company is doing a great job with upsells and cross-sells. It also confirms the significant growth opportunity as only 11% of total customers are currently using more than one solution.

Combining Growth And Profits

Overall, EVCM is a well-diversified business as it has hundreds of thousands of customers across different micro verticals. Some of these verticals are more and others less immune to an economic downturn. For example, health services and home services like plumbing and electrical are recession resistant. These are non-discretionary expenses so SMBs in these verticals are doing well regardless of the economic climate. But other micro verticals like hair salons are directly affected by discretionary spending.

The common denominator of all EVCM customers is that they are small businesses, meaning they're fundamentally weaker than large enterprises. During tough financial conditions, it's very difficult for small and risky businesses to get financing at favorable terms. So they get defensive to preserve cash and survive.

As a software provider for SMBs, EVCM's growth is under pressure because of the inflationary pressures and rising interest rates that are negatively impacting small businesses the most. In Q3, its organic growth, excluding a recent acquisition, was 13% y/y to $158 million, slowing down further from the 16% growth in Q2. Total Payment Volume (TPV) during the quarter increased 22% y/y to $10.5 billion highlighting the increasing use of its payment solution. Embedded payments will be a key driver of EVCM's future growth. They will help boost customer retention as well as revenue per customer. 📈

Meanwhile, in the current environment, the market rewards companies that generate cash flows and don’t need external financing. EVCM is one of these companies as it consistently generates positive cash flows. This is why the stock has rallied despite the weakness in the last quarter. As you can see below, over the past twelve months it made $61.4 million in cash from operations (OCF), translating into a margin of 10.2%.

One of the reasons EVCM went public was to pay down debt. As a private company, it carried over $760 million in long-term debt. They have now reduced it to $532 million and there are no material maturities until 2028 so there’s no liquidity risk given the positive cash flows. Yet the rising interest rates have made the debt more expensive. In the most recent quarter, they paid $9 million in interest, up from $5 million in the year-ago quarter. These interest payments reduce cash flows, and because cash flows ultimately determine a stock price, the debt negatively impacts the stock price.

Despite the debt load, EVCM can still generate nice shareholder returns thanks to its positive cash flows that easily cover interest payments. In Q3, its OCF before interest was over 2x higher than the interest expense during the quarter.

What About Valuation

EVCM has been a relatively cheap stock compared to other SaaS names primarily because of its slower growth rates and its debt load. At current prices of around $10 apiece, it trades at 3.5x sales, which is a very reasonable multiple with expansion potential.

Given that expectations have now been readjusted to the challenging macro environment if the company exceeds estimates in the coming quarters, the sales multiple can easily go up. It could go up to 5x sales, translating into a 72% upside potential for the stock this year, based on expected full-year revenue of $691 million.

What Else

EVCM offers a great suite of cloud-based solutions for SMBs in the services economy that most other software companies have overlooked. These types of businesses have just started to modernize and digitize their operations because of the lack of software solutions tailored to meet their needs.

Short-term weakness aside, the global growth opportunity is significant while the competition is weak. In fact, this is why EVCM is already profitable; it doesn't spend tons of money on marketing to steal customers from competitors because most of its target businesses still use pen and paper and manual processes to manage their operations. Obviously, this won't be the case in the future.

EVERCOMMERCE RATING

Short Term: Moderate BuyLong Term: Buy

🎯 12-Month Price Target: $18

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.