I very rarely get asked about teaser pitches from outside the US and Canada, even though the financial publishing model has certainly migrated to most of the developed markets in the world… so when someone asks about a teaser pitch from another country, it catches my attention. And that leads us to today’s article.

The Motley Fool has long been expanding around the globe, mostly partnering with folks to open affiliates in other English-speaking markets, and those businesses are not quite the same as the core Motley Fool operation in the US… but the idea is that they’ll have similar strategies in appealing to their local groups of investors, whether that’s in the UK, or Australia, or Singapore, or wherever else they may have an office. And as the Fool has grown, they seem to have integrated their global operations more, and the marketing for those foreign offices has tended to become pretty similar to the Fool ads I write about here in the US.

And most of those international Fool locations also have a flagship newsletter, not unlike Motley Fool Stock Advisor, that recommends a couple stocks a month, usually both US stocks and “home market” stocks, and provides basic commentary. That’s the case with Motley Fool UK, and one of their teaser pitches for their flagship service, Motley Fool Share Advisor (£79 for the first year, renews at £149), is what got my attention today. The letter, according to the ad signed by Director of Investing Mark Rogers, promises to recommend one “growth” stock and one “income” stock each month, from either the US or UK markets, and the hook to lure subscribers this time around is that the secret stock they’ll tell you about if you subscribe “could be as big, or even BIGGER than Shopify.”

I’ve only looked at two past teaser campaigns for Motley Fool UK’s Share Advisor, both more than five years ago, and the performance of those particular stocks has been underwhelming (Sports Direct, now Frasers Group was teased in early 2015, specialty chemicals firm Victrex in the Spring of 2016), but we’ll keep an open mind. What’s the tease?

The headline is, “Buy Alert: Self-Repairing Technology From North America” — so it’s probably about a stock in the US or Canada (could be Mexico, Central America or the Caribbean, of course, but unlikely — and in my experience, whenever someone references a “North American” company, it tends to be Canadian).

And the tease itself drops quite a few hints, here’s a little excerpt — apparently the “self repairing” has to do with computer equipment:

“An obscure North American company is taking over Silicon Valley, one device at a time.

“They’ve signed exclusive partnership deals with tech titans like Microsoft, Samsung, HP, Dell, and Lenovo.

“Even Under Armour has enlisted them to protect their intellectual property.

“And if you’re reading this on a laptop, tablet, or smartphone—their unique ‘self-repairing’ technology might already be inside your device!”

They also say that this technology, which apparently is a piece of hardware, is “ready for activation in 500 million devices” and likely is in most of the new laptops being sold right now.

Which is starting to sound a little familiar… but let’s get some other clues to be sure. From the ad:

“We think this company is a cybersecurity trailblazer, which means they’re leading the right industry at the right time….

“This revolutionary technology automatically finds and fixes the exact mistakes that cause most data leaks.”

OK, how about some hype and overpromising, can we please have a touch of that? Our UK friends comply:

“Why We Think This Stock Could Be Bigger Than Shopify

“The Motley Fool has been watching this company for a long time, and we like what we see…

“… we’ve been watching in awe as they keep breaking their own sales records.

“At the rate they’re going, we think this company will be massive… and investors who don’t get in now could be kicking themselves for years to come!”

OK, so it was the Foolies who first turned us on to Shopify (SHOP), and that kind of comparison always gets the juices flowing a little… that was back in mid-2016, when the folks at Motley Fool Canada touted Shopify, followed closely by Tom Gardner and the US Motley Fool Stock Advisor, at around $30 a share (I don’t know which person picked it first, that’s just the order in which we saw the teaser ad pitches). Shopify is now well above $1,000 a share, and those 3,000%+ winners do jump out at you.

That’s probably not going to happen again, the nature of those mega-winners is that they don’t happen very often… but that the person who picks such gargantuan winners will make sure to remind you of those wins every time they run a promo. You won’t see many Motley Fool ads that don’t cite their huge historic gainers like The Trade Desk, Amazon, Disney or, indeed, Shopify. Far more stocks have been teased as the “next Shopify” than will ever beat the market, but, still, hope springs eternal in the human breast (since we’re getting all British-y here, why not throw in some Alexander Pope?)

And to be fair, each Motley Fool newsletter picks its own stocks… and the UK’s Motley Fool Share Advisor came upon Shopify much later than the US and Canadian letters — they note in the ad that the stock became a recommendation in their newsletter in November of 2019. It has still beaten the market handily since then, up about 250% compared to the S&P 500’s 60%, but not quite as dramatic as the earlier picks.

Other clues about this next winner? We’re told that they have 140 patents on their technology, and that they get recurring revenues (1-5 years) from each sale.

Sound familiar yet? Yep, those clues eventually hammered at my memory for long enough that I got up to see who was at the door… and as it turns out, this is our old friend Absolute Software (ABST), a small Canadian company (listed in both the US and Toronto) that was teased by Motley Fool Canada, using very similar language, back in April of 2021.

The stock has come down quite a bit since then, from about $14 to $8.50 (which probably hurts a little extra, since the broader market is up about 15% since then), and I’m sure the story has changed at least a little bit, so let’s see what we’ve got on offer now.

Here’s what I said about the company in April:

“Absolute Software is teased as a “bigger than Shopify” growth idea, and that’s hard to imagine — it’s a small cybersecurity company that provides endpoint management and security (managing all those laptops that workers take home, particularly). They got a boost from the pandemic, though not as much as you might imagine, so they’re trading at about 5X sales, with 15% growth in annualized recurring revenue, which is appealing compared to the sexier Cloud/SaaS stories, and they pay a near-2% dividend. My initial reaction is that it’s worth researching, but I don’t know enough about their business to buy just yet — the dividend both sends a signal that they are not super-ambitious about growth, and probably supports the shares and means a drop of more than 50% is not very likely, so you get (mildly) accelerating SaaS revenue growth and a little less volatility than the hotter “household name” cloud stocks.”

Well, so far we’re still short of a 50% drop, but the stock has certainly been more volatile than I would have guessed. What’s been happening?

Mostly it’s just valuation compression, it appears — the stock is now trading at about 3X sales, with a dividend yield of 3%. And the reason for that compression looks like “the company didn’t grow as fast as people thought it would” — they went public in the US in late 2020, which boosted the shares, and had a good quarter or two after that (they’ve been public in Toronto for a long time, but did an IPO in conjunction with their US listing), but in the time since the Canadian Fool’s pitch they have reported three quarters of financial results, each one categorized as at least a minor disappointment. Throw in the fact that SaaS stocks in general are down a bit recently, and the lower share price is not a big surprise.

That’s the past, though — and what we care about is what we can buy today, and what we think the future will look like. Where does ABST slot in there?

Well, they did announce a substantial acquisition… but in concept, it’s still the same company: They do indeed call themselves “a leader in self-healing zero trust solutions,” and believe themselves to be a leader in “endpoint resilience” for networked computing equipment, which to a large degree means monitoring and maintaining the large fleet of laptops and phones that most corporations have in the hands of their employees. As I see it, this is not about Absolute Software offering it’s own “best cybersecurity software”… it’s about Absolute’s software being able to help IT managers make sure that every laptop their employees are using is in compliance with their security standards and has the latest up-to-date security software and patches.

The big acquisition that Absolute made was of NetMotion, announced back in May and completed a few months later — this is how they describe the rationale of that deal, which was valued at $340 million (a big deal for a company that at the time had a market cap of $700 million… and of even bigger import now, with the combined company having a market cap of $425 million):

“Absolute is an endpoint-centric security company and is a leader in Endpoint Resilience solutions. Absolute has the industry’s only undeletable defense platform embedded in over a half-billion devices. This gives organizations complete connectivity, visibility, and control with an ability to self-heal mission-critical applications so that they remain healthy and deliver intended value. NetMotion brings a network-centric security platform with a proven ability to maintain a resilient connection across networks. This enables users to securely access organizational resources on premises or in the cloud while moving through corporate, home and offsite locations without the need to reconnect or re-authenticate. With the addition of NetMotion, Absolute will offer a next generation solution that combines Endpoint Resilience and network continuity, delivering secure access while enhancing both the security posture of the organization and the end-user experience.”

NetMotion is effectively a subscription company as well, they had Net Dollar Retention of 115%, better than ABST, and were reporting about $55 million in annual recurring revenue (ARR) before the deal was done, and Absolute made the acquisition using debt and cash, so it should have been immediately very accretive to Absolute’s results, as long as the larger business can absorb the costs of the debt reasonably well (meaning, it scales up their per-share financials considerably… since they aren’t adding more shares).

So now, the growth is about the same (NetMotion was growing at a similar pace to Absolute Software), with revenue growing something like 15% (17%, for the most recent quarter), but the level of annualized recurring revenue is much higher at $187 million as of the last Investor Presentation (November).

What we have right now, then, is a company that seems to have made a good strategic match, bringing on another legacy technology company of similar size, and helping them to both scale up the business and offer a broader suite of products for customers. And they should be able to grow, because remote endpoint and device control (and now networking management, from NetMotion), are important in the remote work era… with the selling point that Absolute’s technology is embedded in 500 million “endpoints” (mostly laptop computers). That’s the positive spin.

The pessimist’s take could be that these are two sub-scale businesses who haven’t been able to generate real growth in adoption, even during the huge rush to “work from home”… and maybe they’ve been superseded by newer and sexier cloud technologies, as evidenced by the fact that only 13 million of those 500 million “embedded” endpoints are actually active (meaning, most laptops that have Absolute’s product built in don’t use it)… and this marriage is just a way to postpone their inevitable decline.

I don’t know which story is closer to the truth, but there’s reason for both optimism and pessimism. The valuation is pretty reasonable, and if you ignore the debt and look at EBITDA numbers it’s downright rosy. They have $187 million in ARR, and the market cap is only $423 million. These days, when we’re sometimes paying 20-30X ARR for the exciting cloud SaaS companies, getting ABST, with pretty predictable revenue, at only 2.5X ARR seems like quite a bargain even if revenue is not growing super fast, particularly since they’ve demonstrated in the past that their business model can generate a profit.

They do have the big slug of new debt that funded the deal, though, about $265 million. I haven’t looked up the exact terms of the term loan they took on to pay for the acquisition, but the deal closed on July 1 so their last quarter, from July 1 to September 30, tells us that the debt is costing them about $5 million a quarter, and it looks like they’re also amortizing that loan so the debt will shrink over time. The fact that they’re a high-margin software company makes that somewhat acceptable, they should be able to absorb that cost, but you do have to use a little imagination to see them doing cross-selling across their products and generating some overhead cost savings in the next few quarters to see it generating some consistent earnings growth — the increased scale should work in their favor, but the first quarter as a combined company does not reflect that. My guess is that they will be able to integrate and get to profitability fairly quickly, since both companies were generating positive cash flow before they merged, and retention at both companies has been solid, but it might take a while. And their customer retention really only nets them revenue growth of 5-15% in the best of times, from higher customer usage, to grow faster than that they need new customers.

They are currently guiding to $205-207 million in adjusted revenue for this fiscal year (ending in June), which would be growth of 12-13%, with an adjusted EBITDA margin of 20%, so neither revenue nor profitability is expected to accelerate wildly right now. Still, that would be $40 million in “adjusted EBITDA”, and even though we note that we shouldn’t be that trusting of adjustments, or of using EBITDA when we know that I and A are pretty big numbers thanks to the new debt, that’s a pretty attractive valuation if you think the long-term growth is going to be persistent here. That means they have an EV/EBITDA ratio of about 15 — not necessarily cheap, there are a lot of faster-growing software or similar recurring revenue companies that trade at lower valuations than that (including faster-growing firms like Ebix (EBIX) like PubMatic (PUBM)) but it’s arguably pretty cheap for a small SaaS company that can generate 80% gross margins. Unless the business is about to go into stagnation or decline, they can grow into this… and if they can keep up that growth in the 15% neighborhood, or accelerate it a little, it’s certainly possible that they could get a lot more love from investors. It might take a while, though, lost trust doesn’t come back quickly… and the acquisition might not bring the jump-start that they are hoping for, the company was pretty stagnant for about five years before COVID hit, so perhaps that was just a one-time burst of business and they’re about to go back to being a niche player.

So, I’d be a bit more optimistic about Absolute than I was last April — it’s a more diversified business, with still strong software gross margins that mean they ought to be able to generate solid earnings if they can keep the top-line sales growth going and work through this acquisition, and they are probably not getting credit from investors for the top-line growth that the NetMotion acquisition is bringing.

The near-term hope is that this first quarter or two following the acquisition will probably be artificially depressed as they absorb the costs of the acquisition and begin to make changes and realize cost savings, so it’s quite possible that they’ll be able to improve a little more quickly as we move further into 2022. The near-term risk is that they’ve had disappointing results for three quarters in a row, and even a little reset here is probably not enough to generate excitement and build momentum for the shares.

They’ll probably report their next quarter in about a month, so we’ll have a bit more evidence then — I haven’t talked myself into buying ABST, but it does look better to me than it did last year… and if I were to begin building a position, there’s probably no rush, this is still a small and very lightly-followed company, so I’d buy a little bit and then wait to see if this second quarter after the NetMotion acquisition shows some improvement in the outlook.

But no, we can be pretty definitive in saying that it’s not going to be anywhere near as big as Shopify, not ever, and will never be as good an investment as SHOP was a few years ago. I didn’t envision SHOP going up 5,000% at its peak, either, but Absolute is a very different kind of business, without the immediate scalability of SHOP and in a much more competitive market, and it’s growing much more slowly. If you can get the Shopify daydreams out of your head, Absolute might well work out fine — but if you go in expecting SHOP, it will be disappointing.

Ready to buy ABST? On the Fence? Think it’s no-hope junk? Let us know with a comment below — I’ve got my opinion, but when it comes to your money you get to make the call. Thanks for reading!

P.S. We haven’t heard much from Motley Fool Share Advisor subscribers… so if you’ve ever tried out that subscription service from the UK arm of the Motley Fool, please click here to let your fellow investors know what you think. Thanks!

Disclosure: Of the stocks mentioned above, I own shares of Shopify, The Trade Desk and Amazon. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.