Growth stock at a bargain price

CIBC World Markets says technology stock Docebo Inc. offers big growth at a bargain price versus its peers.


Docebo provides employee training in a highly competitive and fragmented market.

CIBC World Markets analysts Stephanie Price and Scott Fletcher say technology stock Docebo Inc. represents a compelling opportunity. The company’s SaaS (Software as a Service) revenue is growing at twice the industry rate but its stock is trading over five times less than the peer average enterprise value-to-sales multiple despite scoring similar or better on the Rule of 40 (revenue growth and free cash flow margin) metrics.

Docebo Inc. (TSX—DCBO) provides cloud-based learning management systems (LMS). Its cloud platform consists of three modules: Docebo Learn, Docebo Coach & Share and Docebo Extended Enterprise. Docebo’s learning management solutions allow companies to train employees, partners and suppliers. Its cloud solution melds informal learning, coaching and formal learning on one platform. The platform includes AI-enabled solutions such as search and share functionality.

The analysts initiate coverage with an “outperformer” rating and $20 target share price.

Large and growing market

The analysts outline their investment thesis as follows: “Docebo has a large and growing total addressable market (TAM). Docebo’s TAM was US$5.7 billion in 2018 and Reports Monitor expects it to increase at a 21 per cent compound annual growth rate (CAGR) through 2023. Growth in the corporate e-learning market is being driven by the increased use of learning as a cost-effective method of developing the capabilities of and retaining employees, increasing productivity and reducing turnover/staffing costs.

“Docebo’s SaaS offering and focus on social learning are driving growth. The company’s shift to focus on larger enterprise clients has led to a doubling of average contract value in the past three years and the number of learners on the platform has grown at a 200 per cent CAGR over the same period. We expect future growth to be driven by a combination of the shift to larger customers, differentiated features, and OEM [original equipment manufacturer] agreements such as that with Ceridian.”

Quick and efficient growth

“Docebo has grown quickly and in a capital-efficient manner. Since 2016, the company has burned less than US$10 million to reach US$36 million in annual recurring revenue (ARR). The company’s cost to acquire $1 in revenue is $1. Given an average three-year contract, we believe the company sees a solid cost of return on its customer acquisition program.

“While the market is growing at 21 per cent, we expect Docebo to increase its subscription revenue by 37 per cent in 2020.

“In contrast to traditional LMS platforms, Docebo does not focus on compliance- or HR-driven enterprise-wide training. Instead, its solution is typically adopted by enterprises on a departmental or geographical basis and used to train a certain division of the company (for example, Starbucks roastery training). Roughly 50 per cent of Docebo’s customers use the solution to train external partners or customers (for example, Thompson Reuters’ legal training).”

A competitive, fragmented market

“The LMS market is highly competitive and fragmented, with numerous players offering a generally similar set of products. Competitors in the space range from large-scale enterprise (SAP SuccessFactors) to smaller niche players (Docebo, Absorb). Many LMS platforms are offered as a component of broader Talent Management Suites (TMS), which are geared towards human resources departments and offer a variety of HR solutions (recruiting, performance management, compensation, etc.).

“Case in point, Docebo has signed a partnership with Ceridian to integrate with its Dayforce Human Capital Management software. Ceridian will have the ability to enable/disable all of Docebo’s features, allowing it to offer white-labeled learning management within the Dayforce environment. The Ceridian partnership went live in 2019 and we expect it to contribute a two to three per cent lift to Docebo’s ARR in 2020, with strong potential for growth thereafter.

“Docebo’s average contract value [ACV] doubled from the end of 2016 to June 30, 2019. The increase in ACV is tied to the burgeoning number of learners at each customer as the customer profile has shifted. Docebo charges customers on a per learner basis, and the shift towards larger enterprise customers has led to increased average contract values.

“Docebo’s gross margins have climbed over the past several years to close to the 80 per cent range. In our view, solid gross margins set a clear path to profitability as the company scales. Docebo’s gross margins compare well versus other SaaS peers.”

This is an edited version of an article that was originally published for subscribers in the December 6, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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