Apex Technology (NASDAQ:APXT) is a SPAC that’s merging with AvePoint, a company that provides various technology services, including data management. AvePoint appears to be a fine company that’s growing fairly quickly. Moreover, AvePoint is in a favorable sector, and it certainly has some positive attributes. Still, I can’t enthusiastically recommend buying APXT stock at this point.
That’s because I don’t see any positive catalysts that will tremendously accelerate its growth. And despite being in business for many years, AvePoint’s business is unprofitable, while its margins are unattractive.
AvePoint provides services to businesses that utilize Microsoft 365, Microsoft’s (NASDAQ:MSFT) suite of cloud-based productivity tools, including Word and Excel.
Fairly Impressive Growth and Other Positive Characteristics
In its fiscal 2020, AvePoint’s sales jumped 31% to $151.5 million, while its subscription sales soared by an impressive 66% from the previous year, reaching $91 million.
Additionally, InvestorPlace columnist Mark Hake, who’s very well-versed in financial matters, recently wrote that AvePoint is undervalued and placed a $16.19 price target on APXT stock. That target is about 50% above $11.35 where the stock trades today.
And as Hake pointed out, AvePoint expects revenue of $194 million this year, and in the slides for its November presentation to prospective investors, it predicted that its 2022 sales would come in at $257 million.
Also in its November slides, the company pointed out that it has multiple, positive growth catalysts, including the continued expansion of Microsoft’s cloud business, international growth, signing up more small and medium businesses, and the work-from-home trend.
All of these upbeat drivers sound legitimately strong And indeed, AvePoint pointed out that Microsoft’s growth accelerated during the pandemic, while the number of users of Microsoft 365 is expected to double to 500 million over the longer term.
Another key positive catalyst for AvePoint is increased worries about IT security amid the recent, massive hacking attacks experienced by U.S. enterprises, since AvePoint helps companies with security and compliance issues. And finally, as artificial intelligence proliferates and data analysis tools become more advanced, the importance of data management, which seems to be among AvePoint’s core offerings, is increasing.
Huge Growth Isn’t in the Cards
Although I expect AvePoint to continue growing quickly, I do not expect its sales to ever double or triple on a year-over-year basis. That’s because the company seems to be providing fairly conventional services that aren’t in any way transformative or revolutionary. Nor is Microsoft 365 a new or disruptive offering; it’s been around for a fairly long time (it was launched under the name Office 365 in 2011.)
So, there will not be a sudden, gigantic wave of hundreds of thousands of businesses adopting the service.
Meanwhile, in 2020, AvePoint’s operating margin was just 12.1%. That’s a rather low figure for a well-established technology company and suggests to me that the company is primarily providing commoditized services to its clients.
Unsurprisingly, given its low operating margin, AvePoint reported a 2020 operating loss of $15.44 million. Since the company has been in business since 2001 and Microsoft 365 has been around, under one name or another, for a decade, AvePoint’s low margin and 2020 operating loss are worrisome.
In a nutshell, if the company hasn’t been able to become profitable in all this time, and it doesn’t have a new, transformative product, I worry about its ability to generate meaningfully large profits going forward.
The Bottom Line on APXT Stock
Since AvePoint is never going to generate huge growth and doesn’t have a transformative product or service , APXT stock is not a great name for growth investors. And the company’s low margins and lack of profitability limit the attractiveness of the shares for conservative investors.
Hake believes that, based on the valuations of AvePoint’s peers, as provided by the latter company, APXT stock should be valued at 10.8x the company’s 2022 sales estimate.
But given AvePoint’s failure to become profitable and its lack of transformational qualities, I think that 4x the company’s 2022 sales estimate is a more than fair valuation. Based on Hake’s numbers, that results in an enterprise value for the company of $1.285 billion. Dividing that number by the expected share count of 190.7 million yields a price target of $6.74, well below the current price of Apex’s shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, MGM, and Snap. You can reach him on StockTwits at @larryramer.