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Thesis
About halfway down the list of Seeking Alpha’s Top Growth Stocks list is Intapp, Inc. (NASDAQ:INTA):
INTA on Top Growth Stocks list (SeekingAlpha )
Why is this unprofitable information technology stock on the list? Because it is growing rapidly and likely will become profitable in the not-too-distant future. In the meantime, investors are buying on their expectations, as well as the fundamentals in my view.
About Intapp
According to its Q2-2024 earnings report, it sells cloud software solutions tailored to the operating challenges and regulatory requirements of professional and financial services firms. Its reach is global and includes what it calls “the world’s premier private capital, investment banking, legal, accounting, and consulting firms”. its software helps those firms connect their people, processes, and data. And, “As part of a connected firm, professionals gain easy access to the information they need to win more business, increase investment returns, streamline deal and engagement execution, and strengthen risk management and compliance.”
On its website, it claims its client list includes 96 of the 100 biggest American law firms (Am Law 100), 1,500 private capital and investment banking firms, 14 of the top 20 top accounting firms, and 2,400 firms worldwide. Intapp reported on its 10-K for the fiscal year that ended June 30, 2023, that Its software is sold on a subscription basis through a direct enterprise model. At the close of trading on February 27, its share price was $38.84 and it had a market cap of $2.90 billion.
Competition and competitive advantages
Intapp reported in the 10-K that the professional and financial services industry is very competitive. It is also subject to changes brought on by new products, technologies, and more. While the company does not list its competitors, Seeking Alpha offers other application software companies of comparable size. They are C3.ai, Inc. (AI), Envestnet, Inc. (ENV), Q2 Holdings, Inc. (QTWO), and CleanSpark, Inc. (CLSK). It believes that its success depends on being able to demonstrate that its solutions provide better business outcomes than those provided by its competitors.
Price does not appear to be a significant factor in purchase decisions by its potential clients. Those that do count include what it calls “Deep domain experience, and a long-term, trusted relationship,” product innovation and quality, purpose-built solutions for the industries, and brand reputation and name recognition in the industry.
As for competitive advantages, it cites its industry cloud strategy and solutions, which it said is backed up by its deep domain expertise built up in more than two decades of experience. To that, we can add its specialization and the amount of data and insights it must have gained over those 20+ years. Also, its software tools are integrated, allowing users to pull information and data that would not be available in other software.
Margins
This five-year chart shows how Intapp’s gross, EBITDA, and normalized net margins declined in 2020 and 2021, before picking up again in 2022:
INTA Margins chart (SeekingAlpha )
Note that the EBITDA and net margins remain in the red, with only the gross margin in the black. At the end of December, when its second quarter closed, Intapp had a gross margin of 68.97%, an EBIT margin of -13.36% and a net margin of -13.81%.
Can it drive the EBIT and net margins higher and into profitability? It seems quite likely that will happen, based on the progress of the past several years. To do so, it will need to increase revenue or reduce its operating expenses. This excerpt from the second-quarter earnings announcement shows the big three items that keep it away from current profitability:
INTA Operating Expenses table (Q2-Earnings Report)
Cost of revenues is $30.77 million. There’s likely not much room to reduce that line, but it may be possible with research and development, sales and marketing, and general and administrative. Of course, the first two are growth drivers and necessary, while the general and administrative may provide opportunities for cuts or reductions. In particular, take a look at stock-based compensation, which amounted to $16.51 million in the second quarter. That seems rich for a company with total revenues of $103.93 million and is not yet profitable.
Behind all of this is a software model, one in which there are heavy fixed costs to create new products. Over time, research and development costs and marketing costs can decline as the software stabilizes and companies can attract more and more new business from existing customers. For Intapp, revenue growth may do most of the heavy lifting for positive margins.
Growth
As we saw above, Intapp’s gross, EBITDA, and net margins have been recovering. So too, have the metrics behind them: revenue, EBITDA, and net income:
INTA Revenue-EBITDA-EPS chart (SeekingAlpha )
The probability is high that this growth will continue on one or more of these three lines. As the excerpt on operating costs shows, the company spends heavily on R&D, nearly 27.0% of total revenues in the second quarter. That should continue to produce innovations, new products, and new services that contribute to organic growth. It is also generating free cash flow that will support both organic and acquired growth. Free cash flow per share is $0.44 on a [TTM] basis, up from $0.31 in the fiscal year that ended on June 30, 2023, $0.15 in June 2022, and ($0.53) in June 2021. On the bottom line, SeekingAlpha projects EPS FWD Long-Term Growth (3-5Y CAGR) of 35.0%, far more than the sector median of 13.12%.
Long-term growth also should benefit from the acquisitions it has made in recent years: OnePlace Pte Ltd., acquired in 2019, Repstor, acquired in 2021, and Paragon Data Labs, acquired in 2023. And earlier this week, it announced it had signed an agreement to buy delphai, “a Berlin-based AI software company specializing in applied AI for firmographic data automation, structuring, and intelligence.” (firmographics is a way of segmenting organizations in much the same way that demographics are used to segment people).
Intapp should also see growth from its developing partnerships network. For example, it announced a strategic partnership with Microsoft Corporation (MSFT) two years ago. In a news release at the time, CEO John Hall said, “Partnering with Microsoft supercharges our ability to equip each and every professional with easy access to the information they need by aligning our industry-specific solutions with the software they use every day,”. And, it is pursuing international expansion. The company said in its 10-K, “We believe there is a significant need for our solutions on a global basis and, accordingly, opportunity for us to grow our business through further international expansion.”
Management and strategy
Chairman and CEO John Hall has sat at the Chief Executive Officer’s desk since 2007, and before becoming Chairman, was a director. According to his corporate biography, he was a co-founder of VA Linux Systems and helped take the company from startup to IPO. CFO David Morton joined Intapp as Chief Financial Officer in 2023, after more than 20 years as a finance professional. Previously, he had held the same position at the digital security company DigiCert, Inc. Intapp’s overall business strategy is to develop innovative software that helps professional and financial services firms optimize their operations, become more profitable, and improve client service. Within that framework, it has a multi-pronged growth strategy, which includes capitalizing on its applied AI expertise; helping its clients shift to the cloud; adding new solutions to its platform; broadening its geographic reach; and pursuing strategic acquisitions. Intapp appears to have the management expertise and experience, as well as strategies, that it will need to maintain its growth.
Valuation
With negative earnings, some of the metrics we might use to value Intapp are unavailable; chief among them are Price/Earnings and the PEG ratio. The few measures that are available indicate the share price is overvalued. The EV/EBITDA ratio is 78.32, some 409.0% higher than the sector median. Price/Sales (TTM) is 6.93 is more than double the sector median, as is Price/Sales (FWD) 6.83 compared to 2.89 for the sector median. Price/Book is high too…
