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Before the interest rate reduction, Sinch, Bandwidth, Upland, and LINK Mobility (four of the seven companies) traded at a discount to their last twelve months’ (LTM) revenue. Following the interest rate reduction, now only two do. And yet, none of these companies did anything differently to deserve this good fortune. If we assume the interest rate–driven market rally didn’t happen, is it worrisome that almost 60% of the cohort was trading at a discount? Are we a thriving industry, or are our best days behind us?
Disclaimer: This is not stock advice. Everything about the messaging business interests me, including asset pricing. Use your judgment to invest your money.
When times are bad, the stock price is a signal, not a sentence. When times are good, it’s a compliment, not a coronation. The Graham/Buffett/Munger/Bogle aphorism holds true: public markets set the price of an asset, not its value.
Sidebar: A Reflection on CPaaS Growth
For a discussion on the last four years and the growth levers ahead, read the following:
- Messaging and Growth in the Pandemic
- The Four Growth Investments You Must Make
- Messaging and Growth in 2024
But First, Airing Some Annoyance
After over four years of listening to earnings calls, I’m convinced that the markets don’t fully understand the CPaaS space. This is evident from the metaphor-heavy, jargon-laden, indirection-infused questions that many analysts ask as they attempt to “pattern-match” CPaaS to unrelated businesses. A few analysts, like Morgan Stanley’s Meta Marshall, genuinely understand the space, asking the right questions simply and directly. But many seem in a rush to confirm their predecided buy/sell/hold ratings.
Why Only Public Companies?
While all analysis involves some level of scuttlebutt, valuing private companies relies too heavily on gossip, which is inherently sensationalist. I focus on public companies because their data is readily available, and management’s say/do ratio can be dissected through earnings calls and other public forums. Also, given that private valuations typically follow that of public companies in the same industry, it helps me understand where the overall market is trending.
Is It All Doom and Gloom?
As frustrating as the stock market machine may be, it can’t be ignored. It appears that the market is still penalizing the sector for the pandemic-fueled growth. While I acknowledge my bias as a messaging optimist, here’s why I disagree with how the stock market views these companies:
Sinch: Granted, Sinch is going through a reorg to run as a global product-led powerhouse with more debt on its books thanks to an acquisition spree. However that same acquisition spree has led it to become a SMB & enterprise leader. It also remains one of the few CPaaS companies that can claim the ability to contact every mobile phone in the world.
LINK Mobility: LINK has shown discipline in executing a roll-up M&A strategy, ensuring growth and profitability across all regions. It also showed no attachment to past decisions, as seen in the willingness to divest from Message Broadcast when it no longer fit the strategy.
Bandwidth: Bandwidth is aggressively building its messaging business and omnichannel offerings. It’s also the only player openly pursuing the lucrative US political messaging market.
Upland: Upland is an enigma, and perhaps the only one that deserves the stock market beating. Yet it’s sitting on $233M in cash and generating solid free cash flow (FCF).
Instead of solely defending these players, let’s expand our view to include international CPaaS companies. Consider Tata Communications, Tanla, and Route Mobile—three fast-growing companies in the booming Indian market. The market continues to reward their growth rates, with all three trading at an average of 2.7x LTM revenue and 0.36 standard deviation.
Using the expanded cohort, the average valuation multiple is about 3.16x LTM revenue, with the standard deviation at 3.42x. In simple terms, this means there’s a wide range in how these companies are valued compared to their revenues. It’s a sign that there’s quite a bit of uncertainty or variability in how the market perceives their worth.
Finally
A simplistic view is that the market continues to reward responsible growth but still doesn’t completely give credit (or understand) the underlying levers that make these companies leaders in their respective spaces.