VerticalScope Files to List on the TSX Index

Posted on June 2, 2021 by Mathieu Litalien

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June 16, 2021 - VerticalScope has priced its offering near the top end of expectations at $22.00 per share. Assuming the overalotment is exercised in full, the company will have 20,081,361 Subordinate Voting Shares and 2,957,265 Multiple Voting Shares on a fully-diluted basis, 

This gives the company a market cap of $506M. As a result, VerticalScope is valued at 6.73 times sales and has an EV/EBITDA of 15.25. As we mentioned in our initial coverage, this is quite respectable for an high growth tech company. Strong demand for its IPO is a good sign, but we would still exercise caution as the long-term performance of the company remains in question thanks to its spotty history. 

That being said, with a fresh round of financing in the books it is likely the company's growth strategy will be pushed forward and it can return to considerable growth. It already as $18M EBITDA worth of targeted acquisitions for this year and $50M in the pipeline over the long term. 

VerticalScope is expected to begin trading on Monday, June 21, 2021.  

June 14, 2021 - VerticalScope announced it was upsizing its offering to $125M, up from $100M previously. Although a new price range has not been released, upsizing its offering is usually a sign of strong demand. 

Still no listing date, so we will have to wait and see how this all plays out. 

June 2, 2021 - Late last week Vertical Scope file its preliminary prospectus as it seeks to list on the TSX Index. The company is looking to raise $100M at a price between $19-23 per share. The company will trade under the symbol "FORA"

Assuming the over-allotment option is exercised in full, and an offer price at the mid-range ($21.00), VerticalScope will have 18,419,741 subordinate voting shares and 2,957,265 multiple voting shares on a fully-diluted basis. That gives it a market valuation of approximately $450M. 

VerticalScope is a technology company that has built and operates a cloud-based digital community platform serving more than 100 million monthly active users (MAU) and 55 million registered community members across over 1,200 online "Enthusiast communities" (comprising hyper-focused apps, forums, marketplaces, editorial, and e-commerce rating and brand review websites).

The company's FORA software-as-a-service platform is built to accommodate these Enthusiast Communities. It has closed on more than 200 community acquisitions and estimates it has a near-term pipeline of M&A activity that represents US$18M in incremental adjusted EBITDA. Here is a snapshot of some of their communities:

Interestingly, the company has mixed performance in terms of growth. 

In 2020, the company saw a 3% dip in total revenue, this follows a 14% dip in 2019. This is a red flag for a company operating in a high growth environment. 

The pandemic can be blamed for lower digital advertising - a trend that was seen across the industry as companies pulled back on their advertising budgets during the pandemic. 

E-Commerce was strong however, growing 35% in 2020. It also appears that the company is on track for a big rebound in Fiscal 2021 as Q1 revenue came in 41% above Q1 2020 numbers as advertising revenue rebounded in a big way. 

While early 2021 results are certainly encouraging, it is something to be on watch for. Advertising revenue dipped in 2019 as well, so is the jump in Fiscal 2021 simply companies spending thanks to pent-up demand? Will it fade as the year progresses?

Inconsistency here is not unique to 2020, which is a knock against the company.

In terms of valuation, the company is trading at 6.03 times trailing revenue (assuming the C$450M market cap) and as an EV to adjusted EBITDA of 16.9 - which is fairly valued compared to other SaaS companies. The company does have around $90M in debt but intends to use the proceeds from the offering to fund acquisitions which will be the primary source of growth for the company.

It appears the company is tapping the markets as it is likely the most efficient way to pursue its growth strategy. It has already accumulated debt, so it is now time for the company to raise through equity. The company has a large addressable market of online communities, and assuming it can close on its advanced pipeline, will add 82% in adjusted EBITDA over the next year. 

Overall, if the company prices with its range - we'd consider it fairly valued. Given the spotty history, there is a potential it prices below or at the low end, at which point it may start to look attractive.  

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Mathieu Litalien

About the author

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha and Stocktrades. Mathieu also focuses primarily on stock research and content production for Premium and the Stocktrades blog.