A US-based SaaS company with global operations
LiveTiles Limited (ASX: LVT) engages in the development and sale of employee experience workplace software. It creates and delivers solutions that drive employee communication and collaboration in the modern workplace. The company also provides tools to developers and business users to create dashboards, employee portals and corporate intranets.
LiveTiles has operations in North America, the United Kingdom, Europe, the Middle East and Asia-Pacific. LiveTiles Limited has a strategic partnership with Microsoft, N3 and Linius Technologies (ASX:LNU). The company was founded in 2012 and is headquartered in New York.
LiveTiles’ share price had a tough year as it plunged from 30 cents in February 2021 to 7 cents in February 2022. The company, however, seems to have turned the corner by reporting profits for the first time (in its 1HY22 results) and the market clearly approved judging by the share price appreciation since then.
The market expected much faster revenue growth
Let’s see what moved LVT’s share price following the Corona Crash in March 2020.
❶ LVT warns of a challenging sales environment for enterprise software due to the COVID disruptions.
❷ An investor presentation by LVT excites the market. It shows off LVT’s high-profile and a $17bn addressable market.
❸ 3Q21 results show slower revenue growth than what was expected by the market.
❹ LiveTiles announces its FY21 results and further fuels the bearish sentiment on the stock. The market apparently expected higher revenue growth given the contracts LVT signed with Fortune 100 companies throughout FY21.
❺ 1HY22 results showed profits for the first time.
It appears that LiveTiles’ revenue growth fell short of the market’s expectations during the pandemic. This resulted in the market pushing the share price to pre-Corona Crash levels. The sharp rally following the maiden profit announcement could be a sign that the market may have gone too far in punishing the company’s stock.
LiveTiles has turned the corner by reporting profits
As can be seen in the chart, the market had a very positive reaction to LiveTiles’ announcement of maiden profits. The share price broke the downtrend and rallied from a low of 7 cents straight to the first significant resistance level at 15 cents. This quick advance in the share price was then followed by natural profit-taking activities that drove down the share price to an equilibrium level near the psychological support level of 10 cents. This level also coincides with the 61.8% Fibonacci retracement of the rally from 7 cents to 15 cents. From a technical analysis perspective, retracements down to this level can take place without harming the bullish sentiment on the stock.
LiveTile’s on the fast track to increasing profits
According to LiveTiles’ 1HY22 report, the company made an NPAT of $1.34m for the first six months to 31 December 2021. This was a significant turnaround compared to a loss of $21.5m in the corresponding period 1HY21. The significant shift in profitability was due to the company’s strong revenue growth whilst operating expenses remained relatively flat. This scalability is the biggest merit of SaaS companies. Now that LiveTiles has reached the breakeven point from recurring revenue, any further revenue growth will significantly contribute to the company’s bottom line. LiveTiles now has positive operating cash flow with a cash balance of $17.6m. This makes future capital raisings and their diluting impact increasingly unlikely.
As is the case with many technology companies, rising interest rates have a negative impact on the valuation. With the soaring inflation rates, interest rate hikes are just a matter of time, in our view.
How to play LVT
After a quick spike in the price to 15 cents, the profit-taking activity drove down the share price to 10 cents, where the stock has found enough buyers to absorb the selling pressure. As this profit-taking pressure is being absorbed and lessened, we expect to see a gradual increase in the share price towards the resistance level at 15 cents within the next 2 to 3 months (The green line in the chart.)
On the other hand, a break below the current support level at 10 cents is a sign that the market doesn’t believe LiveTiles’ stock is as good as we think it is. Therefore, it can be used as a stop-loss indicator.
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