TechTarget: Hop On The Priority Engine Express For 75% Gains

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Summary

TechTarget (TTGT) is an online lead generation engine for technology businesses. The company manages 200 individual websites focused on different subsectors of technology. These sites feature product selection advice, technology tips, white papers, and other relevant information. The material on these sites is a combination of content produced by TechTarget’s editorial staff and well as product collateral submitted by technology vendors. In order to see all of this content, users must register with TechTarget. TechTarget gauges the buying intent of these users by how many times and for how long they visit each site, and by what they look at on that site. This powerful buying intent information is then passed on to TechTarget’s customers so they can know which firms are looking to make a technology purchase and with what urgency.

TechTarget’s business model has powerful operating leverage. With high (77%) gross margins and mostly fixed operating costs, the revenue drop-down to EBITDA is impressive with a 50-70% incremental EBITDA margin. In 2019 incremental EBITDA margins were even higher, near 90%. The company is forecasting a 50% incremental EBITDA margin for 2020 but it has been known to be conservative in its forecasts.

Competition for TechTarget is virtually nonexistent as it is a niche business which has taken years to build. To duplicate all of the company’s websites and content would take a very long time. Much easier for a larger player to come in and purchase TechTarget. The company is very well managed with the CEO and the Chairman both at the company for many years and having achieved much success with the business.

The company is not reliant on Google for its web traffic. 94% of the company’s traffic is organic and most users know the company’s sites well and visit there directly. Google’s proposed discontinuation of cookies on Chrome plays to TechTarget’s advantage as the company has very little reliance on cookies as compared to other small players in the industry.

15% of the company’s business is branding, where customers either place banner ads on its sites or sponsor various areas of its web pages. The rest of the business is called IT Deal Alert, which is the intent data sales I mentioned above. Within IT Deal Alert is a product called Priority Engine which merges the company’s intent data into its customers’ CRM systems, primarily salesforce.com. This business has been growing rapidly, 27% last quarter, and has been driving the 10% overall topline growth for the business.

TechTarget recently introduced a new product, Priority Engine Express. While TechTarget has traditionally targeted the top 1,500 tech companies as customers, Priority Engine Express is a scaled down version of Priority Engine focused on the next 5,000 players in the industry. It costs about $30,000 a year versus $90,000 for the fuller Priority Engine product. We think success with this product can accelerate TechTarget’s growth rate beyond the 10% range.

While TechTarget’s products were traditionally sold on a quarterly basis the company has been moving towards more predictable annual sales over the past few years. Currently 35% of sales are on an annual basis and the company’s goal is to get to 50% over the next few years.

TechTarget is a little-known name and although financial results and stock returns have been good, we feel there is a long way to go. We are forecasting 10% revenue growth in 2020 and an acceleration to 14% revenue growth in 2021 as Priority Engine Express kicks in. This translates to $49m in EBITDA in 2020 and $63m in 2021. Given the 30% growth in EBITDA in 2021 we feel that a 20x multiple is appropriate. This would result in an equity value of $1.3 billion or $45 per share, a 75% increase from current levels.

Disclosure: I am/we are long TTGT. 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.