Nitro pegged to ignite on structural tailwinds

Given that technology stocks, especially those with higher debt levels and lower cash flow, are sensitive to higher interest rates, it’s hardly surprising that the ASX All Technology Index has been the market’s worst performing sector, down -21.37% year to date.

But due to its emerging productivity platform in a large, growing total available market (TAM) Goldman Sachs has initiated a Buy on Nitro Software (ASX: NTO).

What’s also weighing on the broker’s outlook on Nitro is the current attractive valuation, with the stock’s share price down around 50% since November.

Goldman’s Sachs target price of $2.95 represents 50% upside potential on the current price.

Structural growth opportunity

The broker believes an increase in TAM from 0.14% to 1.4% by FY40 – which implies a 9x uplift to Nitro’s current revenue base - is achievable given the company’s core competitive advantages in price, ease-of-use and customer service, and strong underlying market growth.

The broker estimates that Nitro is exposed to a US$33.6bn TAM globally.

Four key dynamics

Goldman’s robust outlook on Nitro is underpinned by four key dynamics, these include:

• Strongly placed to benefit from structural tailwinds in core markets: The broker believes the market is large enough to support multiple winners in addition to established incumbents Adobe and DocuSign.

• The company’s evolution into a document productivity platform to grow the TAM and improve customer value proposition.

• The broker believes Nitro’s unit economics should improve over time as the business scales and the land-and-expand strategy results in upsell becoming a greater proportion of net new annualised recurring revenue (ARR).

• Compelling valuation compared to peers, with Nitro trading at around a 60-80% discount to SaaS peers on a gross profit growth-adjusted basis and at a 15% discount to the ASX IT Index.

27% compound annual growth over FY21-25

Goldman’s forecasts a 27%-plus FY21-25 revenue compound annual growth rate (CAGR), driven largely by subscription revenue, which is expected to comprise 86% of the company’s revenue by FY25.

The broker’s strong growth outlook is partly based on an inflection point in the business having been reached, where strong subscription offsets a likely bottoming out in perpetual revenue and continues to grow strongly.

Then there’s the strong expectation that a large TAM and strong market growth can support Nitro’s revenue outlook in core PDF and e-sign markets.

In addition to the monetisation opportunity within Nitro’s existing customer base, the broker expects an expansion into new document workflow markets will continue to increase the TAM.

The last three months have not been kind to Nitro's share price.

Based on the two brokers that cover the stock (as reported BY FN Arena), the $1.15 target represents a 115% upside the current price.

• UBS notes that while the operational loss at FY21 proved smaller-than-expected, cash flow was also a positive surprise. The broker has a Buy and a target price $3.80 (31/01/22).

• Morgan Stanley sees continued momentum and awaits management guidance at the 24 February result, when Nitro will provide FY22 annual recurring revenue (ARR) guidance, Adobe/DocuSign results and update on underlying market trends. The broker retains an Overweight rating. Target is $4.50 (31/01/22).

• Bell Potter is bullish on Nitro and regards the recent Connective NV acquisition for US$81m as a game-changer. The broker as a Buy rating and $4.50 price target.

Consensus does not cover this stock.