EVS - valuations

It’s timely to review the valuation metrics for EVS given the recent rise in SP.

EVS has set targets to double ARR to $6m in 2018-19 and double again to $12m in 2019-20. I think we have a clear line of sight to the $6m target (with ARR at 31/1/19 already $5.1m). The focus for EVS now shifts to achieving their 2019-20 target.

The recent rise in SP reflects an appropriate re rate against their $6m arr target. With a current MC of approximately $60m the company trades close to a 10x revenue multiple (PSR).

A growing SAAS company normally goes through three stages: 1) early stage growth, with increasing cash burn 2) the inflection point whereby growing revenues catch up to costs and we see cash burn hit a peak and start to decrease 3) cash burn continues to decrease until the company reaches break even with organic self-funding achieved.

A valuation rises significantly when a company reaches Stage 2 (provided continued rapid growth). From my readings across different shares this stage is often associated with valuations ranging from 10x all the way up to 35x multiples.

If EVS can achieve their guidance of $12m ARR in 2019-20 then a MC of $120m (c.32c SP) would be a conservative estimate. A MC of $180m would be seen under a 15x multiple (not uncommon for rapidly growing SaaS companies).

I believe EVS remains in early stage growth. They have recently expanded key sales staff from 3 to 16 and this comes with associated costs (reflected under employee entitlements in the 2019 interim report). But this is necessary for a rapidly growing company set on growing their sales pipeline.

Future updates will determine whether EVS’s management is able to control cash burn and ultimately hit an inflection point in their history. I remain optimistic for this time and will watch the next 12 months closely.