Nitro Software (ASX: NTO) goes down in a blaze of glory

Nick Sundich Nick Sundich, July 26, 2022

This week, ASX companies have to file their quarterly cash flow and activity reports. Investor reaction varies between different companies; some investors embrace their results, others stay neutral. But Nitro Software (ASX: NTO) shareholders sent shares tumbling this morning after its quarterly, which came with updated guidance for CY22.  


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What is Nitro Software? 

Nitro Software is one of the few US tech companies listed on the ASX, opting a listing Down Under rather than on NASDAQ. It came to the ASX in mid-December 2019 at $1.72 per share – representing a 4.5x EV/revenue multiple. 

The company develops and sells a suite of software products aimed at increasing business productivity and collaboration by allowing advanced documents, especially PDFs, to be created and edited on the go between multiple users. 

We admit, this doesn’t sound very exciting, but PDFs have become more and more prevalent while remaining just as inaccessible to edit. Nitro Software estimates just one in ten workers have a PDF editor and it hopes to ‘fill the gap’. 


Nitro Software slashes guidance 

Nitro Software has never been profitable, but investors were willing to overlook or disregard that fact … until market sentiment changed with rising inflation and interest rates. It reached an all-time high of $4 in November last year before crashing gradually across the year. 

This morning, Nitro fell to $1.18 after it downgraded its Annual Recurring Revenue (ARR) guidance to US$57-60m from US$64-$68m. It blamed macroeconomic headwinds, lengthening sales cycles and lower connective synergies. Although it upgraded its operating EBITDA, its forecast was still negative – it is expecting between -$10m and -$13m. 

The crash came despite the company recording record cash receipts from customers during the quarter and having a strong cash position of US$35.2m. It told shareholders it is aiming for cash flow breakeven by the second half of CY23, but that’s still another 12 months away.


Nitro Software (ASX:NTO) share price chart (Graph: TradingView)

We told you so 

But even when the share price was rising, we were always sceptical of its valuation. In our 9 February 2021 edition of Stocks Down Under, we observed it was 10x EV/Revenue while having 14% revenue growth and therefore doubted its valuation was warranted. We thought the stock price had been inflated as a result of many people working from home, a shift that was significant and vehemently rapid, but not going to continue forever.  

To be fair to the company, it is more reasonably valued now at 3.3x EV/Revenue for CY22 and 2.6x for CY23. This valuation looks more appealing when you consider consensus estimates forecast US$88.7m in revenue for CY23, representing growth of 32% from the mid-point of the company’s guidance for CY22.  


Is the cash pile going to be enough 

But consensus estimates only forecast profitability in CY25 and it remains to be seen if its cash balance will see it through then while it continues to record losses. Given this, and the market’s rejection of non-profitable companies, we think investors with temptation to jump in should resist doing so, at least for now.  


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