Since the tech crisis started in November and markets started to wobble, I advise investors to be on the lookout for cheap stocks. That doesn’t mean they can buy value stocks indiscriminately though, because many cheap stocks are indeed cheap for a reason.
Black Baud (NASDAQ: BLKB), in my opinion, falls into this category. Unless you work for a non-profit institution, charity, or college, chances are you’ve never heard of this software company (and even if you have , given the poor sales of this company, there is also a good chance that you always haven’t heard of it). Blackbaud’s mission is to serve as a vertical software tool and CRM of sorts specifically to serve the needs of non-profit organizations. It was founded in 1981 (which is over 40 years old, which is old in the tech industry), and its rise has more or less slowed to a standstill.
Year to date, Blackbaud shares have fallen more than 25%. The stock slid about another 5% after posting rather weak fourth-quarter results.
While I generally consider that most stocks will cross a lower threshold at which their stock will become attractive, Blackbaud remains a value trap in my view, and I’m downgrading my rating on the stock to to sell. The reason is simple: right now, in today’s declining market, we can find plenty of high-quality software stocks that still have attractive growth potential as well as earnings progress – which I call stocks “growth at a good price”. Blackbaud, on the other hand, is more of a value trap.
Avoid here – losses are more than likely to pile up.
Blackbaud’s attitude is buy it, not build it
One of Blackbaud’s main pitches to investors is that the company caters to a massive TAM or total addressable market.
The company expects its TAM in 2022 to be $20 billion, of which it is only less than 10% penetrated. The lion’s share of this TAM potential, in particular, lies in an $11 billion corporate opportunity, which its recent acquisition of EVERFI (which we’ll talk about next) is attempting to address.
The problem with that thesis: Blackbaud has had 41 years since its launch to try to capture this $20 billion market opportunity. The fact that he only cites 10% revenue penetration, but his organic revenue is only growing at a sub-single digit point reveals one of two possibilities:
- The market is actually not as large as Blackbaud expects
- Blackbaud has an execution problem and other competitors are exploiting this market opportunity at Blackbaud’s expense
Either way, when we see a company of this age growing so slowly despite having such a big market opportunity ahead of it, it’s a major red flag.
The secondary problem with Blackbaud is that it tends to be happy when it comes to mergers and acquisitions. In January, the company announced its latest major acquisition of EVERFI, paying $750 million in cash and stock. EVERFI is a talent/learning platform that helps deliver social impact training to public and private organizations.
The problem is that Blackbaud is already operating with quite limited liquidity. At the end of the fourth quarter, the company had only $55 million in cash on its balance sheet (excluding restricted cash), in addition to $956 million in debt. Needless to say, the acquisition of EVERFI will significantly increase Blackbaud’s indebtedness.
The graph below shows that after the acquisition, Blackbaud will be at a 3.3x net leverage ratio, which is close to its 4x maximum.
A separate question to ask: is Blackbaud paying too much for EVERFI? The copy expects EVERFI to bring $120 million in revenue and $13 million in adjusted EBITDA to the consolidated company in 2022. This means that Blackbaud pays a multiple of around 6 times the revenue of a company with only around 15% growth (there are cheaper listed companies at this rate of growth right now) and a 58x multiple of adjusted EBITDA.
Yes, the acquisition of EVERFI will provide an immediate revenue increase of approximately 10% and will also increase the growth rate of the consolidated business – but what we really what you have to see at Blackbaud to be comfortable is organic growth, not acquired growth.
Unfortunately, growth has lately been lacking. Now let’s talk more about the company’s latest fourth quarter results. The fourth quarter revenue summary is shown below:
Blackbaud’s fourth-quarter revenue rose a paltry 2% year-on-year to $247.9 million, slightly beating Wall Street expectations of $241.8 million, which would have been flat year-on-year . Unfortunately, revenue growth has slowed quite markedly from 7% year-on-year growth in the third quarter.
Here are some anecdotal comments from CFO Tony Boor’s prepared remarks on the fourth quarter earnings call around the company’s growth expectations:
Continued acceleration in contractual recurring revenue growth and another strong transactional revenue performance drove recurring revenue growth of 4% in the fourth quarter. We saw a strong year-over-year improvement in sales productivity per rep, which contributed to an increase in overall ARR bookings. We also continued to see strong positive trends in renewal rates which exceeded our full year plan and some of our early pricing initiatives are starting to have a significant impact. This is a great indication of what is achievable in the future as we continue to execute on the 10 growth engines presented at our investor session last year.
On a full-year basis, our recurring revenue organic growth was 3.5%, and one-time services and other revenues reduced our total revenue growth by approximately 190 basis points. After several years of strategic exit from ad-hoc services, we expect this downturn to bottom out in 2022, and expect minimal impact on total revenue growth for 2022.
Overall, we are very pleased with our revenue performance in the fourth quarter and for the full year 21. We expected an acceleration in the second half, and not only did our results deliver , but they exceeded expectations. We are delighted to continue this momentum in 2022.”
Now I feel like Blackbaud likes to come up with very aggressive targets. For 2024-2025, the company has released a high-level forecast that it expects mid-to-high single-digit growth. And in 2027-2028, he wants to see sustained high single-digit growth.
Never mind that these targets, by themselves, inspire little excitement (who wants to talk about a SaaS company that isn’t growing even 10% y/y?). Are these goals even achievable? The company listed a variety of factors that could drive further growth:
Another comment worth mentioning: Blackbaud continues to have one of the most disappointing gross margin profiles in the tech industry. In the fourth quarter, pro forma gross margins were 55.3%, down 180 basis points from the prior year quarter. This is around 20 points less than most SaaS peers, and indicates that Blackbaud’s ability to achieve operational leverage is much more limited compared to its competitors.
Key points to remember
Blackbaud continues to be a dead end business. Growth has stalled for years, and the company continues to try to solve its problems by overpaying for acquisitions. With a lower margin profile than its peers and massive leverage, this continues to be a red flag value trap.