There has been a lot of cold water splashed on the hot SPAC (special-purpose acquisition company) market. So much so that investors seem to be ignoring a lot of the potentially interesting names in the space. One such SPAC that investors should consider is Apex Technology Acquisition (NASDAQ:APXT) which is set to merge with AvePoint. APXT stock is now trading at close to the SPAC floor of $10 per share. APXT stock fell 41% from its all-time high.
Most of this decline is due to the overall bearish sentiment for SPACs and nothing to do with APXT.
AvePoint’s merger with APXT has hit a bit of a snag. The delay stems from the SEC tightening regulations for SPAC vehicles. In particular, Apex is reviewing the accounting treatment of its warrants to ensure compliance with the new SEC guidelines.
Accounting firms are anticipating that the SEC will change the balance sheet treatment of SPAC warrants from equity to liability. We can see the chilling effect this has had on the industry as new SPAC offerings have ground to a halt.
Nothing to Worry About SEC’s New Rules
However, this is a minor risk in my opinion as the existence of these warrants were already disclosed to investors during the merger process. What may change is the composition of the company’s balance sheet as these warrants may be put explicitly as debt on the books. Most investors in high-growth technology stocks are focused on top-line growth and market share.
The SEC has made recent statements warning about the risks of SPACs. In particular, the SEC was worried about misstatements and the misconception of lower disclosure requirements. Truth be told, I am more concerned with SPACs that lack robust internal controls and seasoned financial reporting personnel. SPACs with these issues may be at risk of material restatements of their financials.
I do not believe Apex and AvePoint fall into this category. AvePoint’s senior management team is comprised of highly experienced professionals from Fortune 500 firms, including ex-investment bankers. The company also has been in operations for more than 20 years. Therefore, I am confident that the company’s accounting processes and internal controls will be solid right off the gate.
In my view, this issue with the warrants is just a delay in the deal’s eventual closing. In fact, AvePoint management is so confident in the deal closing that it has started a $20 million buyback on APXT stock.
The Company’s Financial Results Remain Solid
AvePoint recently released the preliminary results for Q1 2021. The company reported between $26.7 million to $27 million of subscription revenue, which represents growth of 49% year over year. Total revenue is expected to come in at $38.4 million to $38.8 million. The company’s ARR (Annual Recurring Revenue) has grown by 32.6% to be between $128 million to $129 million.
Like most Software As a Service (“SaaS”) companies, AvePoint’s ARR is a good measure of its stable and recurring income. The company defines its ARR as long-term contractually obligated revenue from its subscription, maintenance and channel business. The acceleration in the growth of AvePoint’s ARR is quite remarkable. In 2019, year over year ARR growth was only 18-25% every quarter compared to the near 30% growth recently.
This makes me confident that AvePoint will be able to hit its estimated 2022 revenue projections of $220 million in recurring revenue. This gives it a roughly 7x price-to-sales ratio at APXT stock’s current price.
The Bottom Line on APXT Stock
As Microsoft (NASDAQ:MSFT) continues to grow its Azure platform, AvePoint will tag along for the ride. Buying APXT stock is one way to take advantage of this growth. Being a smaller company with an equity value of $2 billion upon closing, APXT stock could appreciate faster than MFST stock as it is coming from a lower base. More risk-oriented investors should consider taking a position in APXT stock at these levels.
On the date of publication, Joseph Nograles held a LONG position in MSFT.
