Down 50%, EngageSmart Stock Presents a Compelling Opportunity

EngageSmart Inc Helps Improve Customer Experience

The beginning of this year has seen technology stocks attract strong buying. This isn’t surprising, given the significant price deterioration of tech stocks in 2022.

For risk investors, there are aggressive opportunities for those who are patient and are willing to accept volatility. That’s the case with EngageSmart Inc (NYSE:ESMT), a provider of cloud-based software that allows customer-facing companies to offer better digital experiences. (Source: “Corporate Overview,” EngageSmart Inc, last accessed January 31, 2023.)

EngageSmart’s software-as-a-service (SaaS) platforms help with e-commerce-related tasks such as paying bills and scheduling appointments. Its clients include doctor’s offices, insurance companies, non-profit organizations, and public utilities.

The global customer engagement solutions market that EngageSmart Inc is part of could expand at a compound annual growth rate (CAGR) of 10.1% from $18.2 million in 2021 to $43.4 billion in 2030. (Source: “Customer Engagement Solutions Market Revenue Analysis,” P&S Intelligence, last accessed January 31, 2023.)

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Shortly following its initial public offering (IPO) in September 2021, which had a share price of $26.00, ESMT stock jumped to $38.83. At that time, EngageSmart Inc had a market valuation of $6.4 billion, versus its current valuation of $3.1 billion.

Chart courtesy of StockCharts.com

Solid Fundamentals Support Bull Case for ESMT Stock

In its three years of public disclosure, EngageSmart Inc grew its revenues by 163% from 2019 to a record $216.3 million in 2021. The company’s revenues for the rolling 12 months to September 2022 came in at $281.6 million.

The consensus estimate for 2022 is that EngageSmart Inc increased its revenues by 39.6% to $301.9 million. Analysts forecast that the company will grow its revenues by 25.6% to $379.2 million in 2023. (Source: “EngageSmart, Inc (ESMT),” Yahoo! Finance, last accessed January 31, 2023.)

(Source: “EngageSmart Inc.” MarketWatch, last accessed January 31, 2023.)

EngageSmart managed to control its cost side as its revenues ramped higher. That helped the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) turn positive in 2020 and 2021.

(Source: Ibid.)

On the bottom line, EngageSmart Inc has been losing money based on generally accepted accounting principles (GAAP) diluted earnings per share (EPS).

The good news is that the company’s GAAP diluted EPS loss fell significantly in 2020 and 2021. Adjusting for non-recurring expenses, EngageSmart earned $0.13 per diluted share in 2021.

For its upcoming 2022 results, the company is on target to beat the consensus earnings estimate after reporting three straight quarters of beats. Analysts estimate that EngageSmart Inc’s earnings rose to $0.27 per share in 2022 and that they will rise to $0.26 in 2023. (Source: Yahoo! Finance, op. cit.)

(Source: MarketWatch, op. cit.)

EngageSmart Inc’s free cash flow (FCF) was positive in 2020 and hit a record $18.8 million in 2021.

(Source: MarketWatch, op. cit.)

EngageSmart Inc’s balance sheet includes solid working capital, manageable debt of $33.0 million, and healthy cash of $293.5 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

EngageSmart stock has strong institutional ownership, with 151 institutions holding a 90.9% stake in the company. (Source: Yahoo! Finance, op. cit.)

My bullish thesis for EngageSmart Inc is based on the strong tailwinds in the digital transformation market, which could drive up the value of ESMT stock.