In late November, special purpose acquisition company (SPAC) Apex Technology (NASDAQ:APXT) announced that it was merging with data management company AvePoint. APXT stock soared on the news.
Shares gained 29%. As recently as early February, they were valued above $16, against the $10 merger price.
Of course, that was a very different environment for SPACs. Through the beginning of this year, the group seemed like easy money. Many SPACs soared even before a deal was announced.
And many of those stocks needed a pullback. Some needed a huge pullback. Investing requires work and due diligence; when nearly every single member of a group is soaring, it’s almost always unsustainable.
But that pullback now looks a lot like the rally. Indiscriminate buying on the way up has turned into indiscriminate selling on the way down. With APXT stock nearing the $10 merger price, the selling here simply has gone too far.
The Case for AvePoint
The initial optimism toward the tie-up between Apex and AvePoint made some sense.
AvePoint is a leader in data management for the largest cloud platform. Its growth so far has been solid. The company is nicely profitable, with adjusted operating margins of 12% in 2020.
There are tailwinds blowing as well. The novel coronavirus pandemic has accelerated the shift to the cloud from on-premise. That’s a trend right in AvePoint’s sweet spot.
And longer-term, increased adoption of remote work similarly should drive growth. Remote work requires cloud offerings instead of on-premise. It also raises significant needs for data management and security — needs that AvePoint serves.
November vs. May
So, what happened?
Again, SPACs have sold off. The pressure on APXT stock lines up perfectly with many other SPAC stocks.
It’s not as if AvePoint has done much, if anything, to change investor minds. If anything, the news from the company looks positive.
In early March, the company disclosed 2020 results for AvePoint, which showed revenue growth of 31%. That was five points better than the company had projected in late November. Not only is the better growth good news, but the fact that guidance was issued so late in the year suggests that AvePoint finished 2020 strong.
Preliminary results for the first quarter, released last month, also look like good news. AvePoint’s subscription revenue rose 49% in the quarter, and the company raised its top-line outlook for the full year.
Unusually, the company is even executing a stock buyback. It’s not a huge buyback, certainly: $20 million against a pro forma market capitalization for AvePoint of nearly $1.8 billion. But AvePoint is using its existing corporate cash to buy APXT stock on the open market.
That’s a vote of confidence. Given the results in 2020 and Q1 FY2021, that confidence seems earned.
The Pullback in APXT Stock
In this context, the decline in APXT stock doesn’t make any sense at all. But in another, there might be a bit of logic.
Even with the pullback to $10, shares aren’t exactly cheap. Based on revenue guidance for this year, APXT trades at about 9x revenue. Using operating income projections from the recent prospectus, the stock is valued at about 250x this year’s adjusted net income (though those same projections predict roughly 100% growth in 2022).
But in context, both multiples make some sense. For a growing cloud play, 9x revenue is cheap on a relative basis. Earnings multiples are deflated by wise investments in the business, which lower near-term profits in exchange for long-term gains. That’s exactly what a company like AvePoint should be doing, particularly with the transition to the cloud-only beginning.
By fundamental measures, APXT stock still seems relatively cheap, even if headline multiples suggest otherwise. That’s not to say that it’s a value play, but rather that its current growth suggests upside over the long-term if the company continues to execute.
In this market, and in this sector, that’s really all an investor can ask for. And given that many of those investors were willing to pay $17 a share just a couple of months ago, getting AvePoint for the $10 merger price seems like a good deal indeed.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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