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Buy remote IT connector TeamViewer at a pre-pandemic price
Ask a Manchester United fan where they’re from and the least likely answer will be Manchester, or so the football joke goes. The club now has a new fan after German technology company TeamViewer announced a five-year shirt sponsorship deal with the club worth a rumoured €275 million.
We have no idea whether this will be an astute bit of marketing, but the deal sparked a sell-off in the stock that we believe presents a fantastic entry point, an opportunity to buy TeamViewer at pre- pandemic prices.
Investors were left in a huff because of the drag on profit margins in the near term. Management admitted that the Man Utd deal will cut its adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) margins to around 49% to 51% this year (to 31 December) having previously guided for a 55% to 57% range.
Yet this is part of a wider investment in growth that should pay-off handsomely down the line, using the pandemic’s work from home new normal to drive home its advantages. And it has plenty of those.
The German company has built a real-time remote connectivity platform that lets IT experts take control of devices (PCs, laptops, smartphones etc) to solve problems or to enable people to connect and collaborate from home, different office locations or anywhere else, while the organisation maintains control of its core IT.
REMOTE ACCESS BOOM
If you’ve ever had to call your work IT support team for help and had them take over your device virtually to find a fix, you may well have used TeamViewer, even if you didn’t know it. Founded in 2005, TeamViewer’s remote software has been installed in more than 2.5 billion devices worldwide and its tools are in action on up to 45 million users at any given time.
Private equity firm Permira brought the company to the Frankfurt Stock Exchange in September 2019 with a €5.25 billion price tag, selling 42% of its stake to investors at €26.25 per share. Permira has continued to release shares into the market over the past year or more, most recently last month, leaving it with a stake of just below 20%.
Like so many tech firms, Covid has made investors suddenly appreciate TeamViewer’s digital growth potential, with the stock hitting a record €51.48 last July, and rallying to close on €50 again earlier this year, before investors went off growth stocks thanks to inflation fears.
That the company is willing to plough significant sums into innovation is encouraging because remote IT support is far from competition-free. Industry heavyweights like of Microsoft, Citrix, LogMeIn and others operate in this space. Many analysts, however, think TeamViewer leads the way as the high-quality, large bandwidth, all-in-one platform to connect, manage and interact.
A study by independent global quality assurance company Qualitest found TeamViewer compatible with significantly more device types than peers, and the internet bandwidth scale to send large raw data files at significantly faster speeds.
The wider remote support market is also rapidly expanding, not least because of the scope for enormous connected device expansion as the Internet of Things world gets bigger. A McKinsey report estimates that the size of the remote connectivity platform market will triple by 2023 from €10 billion in 2018.
Analysts at Berenberg believe TeamViewer’s total addressable market will expand to €40 billion over the same timeframe. This will be driven by the company widening its customer base, deepening its sales and marketing pool, and adding new tools around areas like augmented reality, such as its recent acquisition of Ubimax.
SCALABLE BUSINESS MODEL
This is an easily scalable business model that should throw off lots of free cash flow and deliver very attractive 50% average profit margins over the long-run. That should mean strong growth, excellent cash flows and an improving track record when it comes to using that cash for value creation.
Return on capital employed, a measure of how effectively the company spends its cash, has more than doubled on 2018’s 7.3%, and is forecast to improve to nearly 30% over the next couple of years.
Things like cybercrime, changes to data privacy regulation and IT infrastructure faults could potentially slow TeamViewer’s growth, yet managing these sorts of risks are part of TeamViewer’s knitting.
Given the recent slide, the stock is trading on a 12-month forward price to earnings multiple of 56, according to Refinitiv data, although that will fall to 34 by 2022 if Berenberg numbers are right.