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Quickly understand WM technology
WM Technologies (Nasdaq: Map) reported its financial results for the second quarter of 2022 on August 9, 2022, which missed revenue estimates and beat EPS estimates.
The company provides software solutions E-commerce and compliance needs of cannabis retailers and brands.
I have reservations about MAPS in the short term until the company sees substantial revenue growth and reduced operating losses in new markets such as New York and New Jersey.
Overview of WM Technology
Irvine, California-based WM Technology was founded in 2008 to develop a platform and marketplace (Weedmaps) for e-commerce functionality related to ordering cannabis products online.
The firm is led by CEO Chris Beals, who joined the firm in 2015 and previously served as Senior Vice President at Colbeck and Senior Corporate Counsel at Deutsche Telekom NA
The company’s main products include:
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Weedmaps online marketplace
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WM Business Suite
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Germination CRM System
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Cannveya Delivery and Logistics
The company acquires customers through its online work as well as its direct sales and marketing efforts to businesses.
Market and Competition of WM Technology
According to a 2022 market research report by Verified Market Research, the global market for software for the cannabis industry is estimated at $476 million in 2020 and is expected to reach $3.6 billion by 2028.
This represents a forecast CAGR of 30.18% from 2021 to 2028.
The main driver of this expected growth is the success of legalization, resulting in greater regulatory demands to improve legal compliance and the need for the efficiency of cannabis organizations.
Additionally, many countries have legalized the use of cannabis products, at least for therapeutic purposes and in some cases recreational use.
The chart below shows the expected growth trajectory of various cannabis industry software market technologies through 2028:
Cannabis Industry Software Market (proven market research)
Key competitors or other industry players include:
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plenty of organic matter
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Canix
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Area
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booming software
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traffic center
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green bits
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Spiral Bio Tracking
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MJ Expressway
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Retail Innovation Lab, LLC (Cova Software)
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SYSPRO
Weimar Technology’s Recent Financial Performance
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The quarterly total revenue growth is shown in the chart below:
9th quarter total revenue (look for alpha)
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Gross profit by quarter is roughly the same as total revenue:
9th quarter gross profit (look for alpha)
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Selling, G&A expenses as a percentage of total revenue have risen significantly in recent quarters:
9Q Sales, G&A Revenue Percentage (look for alpha)
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Operating income by quarter has turned negative in recent quarters:
9th quarter operating income (look for alpha)
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Earnings per share (diluted) fluctuate according to the following table:
9th quarter earnings per share (look for alpha)
(All figures in the above charts are GAAP.)
Shares of MAPS are down 84.6% over the past 12 months. The U.S. S&P 500 fell about 16.5%, as the chart below shows:
52-week stock price (look for alpha)
Valuation and other metrics for WM technology
The following table shows the relevant capital and valuation data of the company:
|
measure [TTM] |
quantity |
|
Enterprise Value/Sales |
0.92 |
|
revenue growth rate |
23.4% |
|
Net Income Margin |
24.4% |
|
GAAP EBITDA % |
-8.9% |
|
market value |
$270,550,000 |
|
Corporation value |
$203,780,000 |
|
operating cash flow |
$2,740,000 |
|
Earnings per share (fully diluted) |
-$0.06 |
(Source – Seeking Alpha)
The Rule of 40 is a rule of thumb in the software industry that as long as the total revenue growth rate and EBITDA percentage equal or exceed 40%, a company is on an acceptable growth/EBITDA trajectory.
As of the second quarter of 2022, MAPS’ latest GAAP Rule 40 calculation is 14.5%, so the company needs to make significant improvements in this area, as shown in the table below:
|
Rule of 40 – Yawn |
calculate |
|
Recent Pastor Growth % |
23.4% |
|
GAAP EBITDA % |
-8.9% |
|
all |
14.5% |
(Source – Seeking Alpha)
WM Technology Review
In its last earnings call (source – Seeking Alpha) covering Q2 2022 results, management highlighted that its underperformance was due to “macro challenges, particularly the significant increase in natural gas prices and other inflationary pressures this quarter.”
The company was forced to remove some customers from its platform due to non-payment, and expects inflation and other economic pressures to increase its customers in the second half of 2022.
That’s despite growing optimism in other states “ready to pass new legalization measures within the next two years.”
Also notable is the president’s recent move to pardon those convicted at the federal level, or about 6,500.
As for its financial performance, revenue grew 24% year over year despite a notable decline in the licensing channel across the market.
The company’s net dollar retention rate for June was 92%, indicating worsening performance as nearly 500 customers were unable to pay or were placed on payment plans.
WM’s Rule of 40 results have been subpar, even though the company isn’t strictly a software company.
Gross margin was 93%, flat sequentially, while SG&A as a percentage of revenue remained high.
As a result, the operating loss for the second consecutive quarter was still well above $10 million.
For the balance sheet, the company ended the quarter with $47.6 million in cash and no long-term debt.
Over the trailing 12 months, free cash used was $13.0 million as the company’s capital expenditures were $15.7 million.
Going forward, management expects third-quarter revenue growth to be in the “low double-digit” range and doesn’t assume any material revenue contribution from New Jersey or New York for the fiscal year.
Regarding valuation, the market values MAPS at around 0.92x EV/Sales multiple.
The SaaS Capital Index of publicly held SaaS (software as a service) software companies shows an average forward EV/revenue multiple of approximately 6.9x as of September 30, 2022, as shown in the following chart:
SaaS Capital Index (SaaS Capital)
Thus, by comparison, at least as of September 30, 2022, the market is valuing MAPS well below the broader SaaS capital index.
Key risks to the company’s outlook are a macroeconomic slowdown or recession and reduced access to capital for potential licensees, both of which could slow the sales cycle and reduce its revenue growth trajectory.
With recent jobs data pointing to further strength in the U.S. economy, it’s increasingly likely that the Fed will continue to raise interest rates, increasing the cost of capital and reducing its availability in the process.
Given MAPS’ operating loss profile, this could put further downward pressure on the company’s potential customers while reducing MAPS’ valuation multiple.
I have reservations about MAPS in the short term until the company sees substantial revenue growth and reduced operating losses in new markets such as New York and New Jersey.