So Carebook released their Q3 numbers on Friday morning. The numbers were nothing out-of-the-ordinary, which was expected, as the focus of late has been on M&A. The recent acquisitions are attractively priced (2.5 – 3.5x sales) and will ’add diversification to Carebook’s customer base, verticals and geographic footprint’. For those who were zeroing in on the 'NET INCOME' line, you should understand that CRBK is an early-stage growth company, not a blue-chip stock. The company has incurred significant software development costs to get the platform to where it is today; these are not variable costs. So the focus for investors on these Q3's should have been on the MD&A and future growth prospects, not the net income line. If we look at EBITDA, it is actually expected to crossover into positive territory this year, and will hit +$2M in 2021. The company will be profitable next year.
Along with the financial statements, came an interesting little analyst note from Canaccord. Surprisingly, despite these recent accretive acquisitions, the analyst kept his price target on the stock at $2.50, which leaves me sitting here wondering why....
The previous analyst report ($2.50 target) on Carebook came out over a month ago and the price target was already low, at $2.50 (only 4x EV/sales). This was BEFORE Carebook had announced these two recent acquisitions. So this week alone, CRBK announces two acquisitions which will triple revenue and bump EBITDA up to +$2 million, but the analyst decides to keep his price target unchanged....?
If you look at WELL or DOC, every single time either company made an acquisition, the analysts would revise their estimates and price targets higher to account for the increase in revenue and EBITDA.... Because when revenues are HIGHER and EBITDA is higher, a company's valuation will be HIGHER; that isn't rocket science. So I am sorry, but the fact that today’s price target was the same as it was a month ago makes absolutely no sense.
So why are Carebook's future growth prospects are not being assigned fair value relative to other companies in the space? Who knows. Maybe it's because of the unfair assumption that CRBK is going to fund these acquisitions by raising $15 million in equity at $1.75. Which seems odd, considering they raised $20 million at $2.50 just a few months ago and the multiples for digital healthcare stocks are much higher now than they were at the time of the raise.
In my opinion, this is an unfair assumption and only serves to hold down the stock price of CRBK. It’s a ‘catch 22’ because the analyst knows that a higher share price will mean more accretive acquisitions, but at the same time, the analyst is essentially putting a lid on the share price by telling the street that the next financing is going to be done at $1.75... when in reality this is unlikely to be the case. I think they should have waited until knowing further details about the financing before going ahead with that assumption.
This was particularly interesting to me and got me thinking…. Which house would be the most likely to participate in the next big financing on CRBK? Which house has an average currently higher than $1.75? Which house stands to benefit the most from Carebook doing a raise at lower prices ($1.75)?
In all honesty, I don't know if this was intentional misdirection, a sloppy mistake, or just a poor analysis, but there also some numerical errors in the report.
In the original analyst report which came out last month, the analyst used BASIC shares outstanding to calculate the market cap and enterprise value. But in today's report, for some reason he used FULLY DILUTED shares outstanding in today's report to reflect the market cap, which resulted in an inflated market cap value of $80M. The current market cap of CRBK is not even close $80 million.....
If an analyst is going to use the fully diluted number of shares outstanding to report market cap value, then they MUST assume that those warrants and options are exercised and reflect that in the cash position, otherwise the multiples will be skewed as a result of not doing so. But realistically, he should have used basic outstanding shares like he did in the last report. Not only for consistency, but also because the outstanding securities are not even in-the-money.
In any case, I was a buyer all week and will continue to be next week as well. The blackout will be lifted on Tuesday. I would not be surprised to see insiders come in to support this in a BIG way, as they have been unable to buy for a while now.
Have a good weekend everyone.