Pareto on Linkfire – Valuation Remains Too Low

Linkfire is down 90% since its IPO despite growing strongly, strong improvements in financial performance, cash breakeven to be reached in 1Q23, and new contracts with strong partners. The only mistake they made – they raised capital in a worst time. We believe Linkfire reached a bottom and should be one of the most promising positions for the next year.

Over the last few weeks we have increased our position several times. It is now a material position for our family office and we would be among the top 20 largest investors.

I enclose summary of the Pareto research published yesterday.

Pareto on LInkfire:

Entering FY’23 with cash and momentum

Linkfire reported a strong Q3’22 report, showing 43% revenue growth on a constant currency basis (65% incl. FX), and earlier in December communicated that the company had completed the first tranche of its capital raise, raising DKK 22.5m from the issue of 55.5m new shares. Furthermore, the company showed signs of a much lower opex cost-base in Q3 (down 22% q/q from Q2), strengthening our belief in its path to EBITDA profitability in FY’23. We reiterate our Buy recommendation with a raised TP of SEK 1.48 (1.30), which corresponds to EV/S of 2.4x on 2024E. 

What to expect in terms of revenue growth going forward?
Closest in time, we expect Q4’22 to be strong in terms of topline growth, where we expect 60% growth y/y, including FX effects. This will be driven by a large amount of consumer connections, as the fourth quarter typically has the greatest amount of traffic flowing through Linkfire’s smart links, as well as being the time of year when the effect of renegotiated contracts with the large music labels typically shows. Furthermore, we expect the company to show a greater RPM in Q4 than in Q3, driven by further monetization optimization of its traffic. For FY’23, we expect the revenue growth to be weaker than in FY’22, and fall in the middle of its new communicated growth target of 20-40% organic topline growth, where we estimate 31% growth. For FY’24, we expect 23% organic revenue growth.

Expecting cost base to be smaller in FY’23 than in FY’22
We expect the staff costs to decrease by 22% y/y between FY’22 and FY23, driven by further staff reductions. In terms of other opex, we expect to see these decrease greatly y/y also between FY’22 and FY’23. Given these expected reductions in the cost-base, we expect Linkfire to reach an EBITDA result of DKK -118K for FY’23, despite estimating a relatively conservative topline growth of 31% for FY’23, as mentioned above. 

Valuation remains too low given cash inflow from the capital raise
We believe that Linkfire, following both the tranches of the capital raise, where we expect the second one to be completed in Q1’23, will not need to take in any further capital until the company reaches profitability, assuming that the company shows a strong cost-control going forward. Given this, we argue that the financial risk has significantly decreased in the company compared to earlier this year. With a valuation entailing a significant discount to peers, 1.9x on 2024E EV/S vs the peer median at 3.7x (a discount of ~50%), we repeat our Buy recommendation and raise our TP to SEK 1.48 (1.30) on the back of the strong performance in Q3 and lower perceived financial risk, resulting in a slightly lower WACC.

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The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.

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