Can Recent IPO EngageSmart Rally On Triple-Digit EPS Growth?

In hindsight, the second half of 2021 was a particularly inauspicious time for a company to go public, but that’s the fate that EngageSmart Inc. NYSE: ESMT suffered. 

Although the stock has a lot of work to do before regaining its 2021 highs, analysts expect the company to continue on its trajectory of rapid sales and earnings growth, making this a stock to keep an eye on.

This is an example of a company whose business case is compelling, but because the stock is small and new, it’s not on many investors’ radar yet. Stocks like this are often well into a rally before the majority of investors even know the company exists.   

EngageSmart, which specializes in customer engagement software and integrated payments solutions, made its public-market debut in September 2021, just three months before the broader market rolled over into a lengthy correction. 

Going Into Rally Mode?

EngageSmart didn’t have a chance to get any traction after an opening-day pop, but if analysts’ earnings forecasts are any indication, the stock may have a good chance of going into rally mode. 

However, it’s possible that a large, sustained rally in the stock could be delayed if the broader market pulls back, as many analysts expect might happen before year’s end. 

But let’s look at what this company has going for it: Unlike many newly public companies, EngageSmart is profitable, having posted earnings of 12 cents per share in 2022. This year, that’s expected to rise by a whopping 176% this year, to 33 cents per share, and by another 27% next year, to 42 cents a share. 

What’s driving these leaps and bounds? 

Consistent Year-Over-Year Revenue Growth

MarketBeat’s EngageSmart earnings data show a history of year-over-year, as well as sequential, revenue growth since the company went public. The company has topped sales views in every quarter, and grew revenue at rates between 31% and 53% in the past eight quarters. 

The company first turned a profit in the quarter ended in March 2022, and has been in the black ever since. 

EngageSmart analyst ratings show a consensus view of “moderate buy,” with a price target of $25.88, an upside of 36.33%. Because EngageSmart is new and small, with a market capitalization of $3.164 billion, it hasn’t yet attracted much analyst coverage, but that’s normal for a company of its age and size.

Mixed Signals, But Good Potential

There are certainly mixed signals when it comes to this stock, but the price target and earnings outlook suggest good potential. 

On July 13, Goldman Sachs downgraded EngageSmart to neutral from buy, but maintained its price target of $21. Shares fell 3.06% on June 13, closing at $18.98. Trading volume was 13% heavier than normal. 

The company is due to report its second quarter on or around August 3, with Wall Street expecting earnings of Consensus:  4 cents per share on revenue of $93.21 million. That would be flat on the bottom line, but an increase of 26% on the top line. 

EngageSmart operates two business segments, SMB Solutions, which focuses on practice management software for the health and wellness industry; and Enterprise Solutions, which spans several verticals, including health and wellness, government, utilities, financial services, healthcare and giving.

Capitalizing On Digitization Trend

In the most recent earnings call, CEO Robert Paul Bennett said the company’s enterprise segment “is well positioned to capitalize on the long-term trend of organizations digitizing their operations, providing a steady tailwind for growth.” That business unit’s revenue growth in the quarter was fueled by strength in digital payments and paperless adoption and continued customer on-boardings. 

The company says its competitive advantage is its ability to simplify processes through digitization. It develops software-as-a-service (SaaS) solutions specifically tailored for each vertical it serves. According to the company, its software solutions “simplify and automate mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing.”

In its most recent annual report, the company also said, “We believe the markets we serve are burdened by legacy systems and processes that result in operational inefficiencies and relatively low digital adoption from consumers.” 

Focusing On Verticals With Room To Grow

EngageSmart typically focuses on verticals that have low digital adoption, making room for strong growth as they make the transition. 

So where does this leave investors? EngageSmart looks to be a good watchlist candidate for several reasons. It’s a newly public company, meaning it’s in the window of time when companies often post big price moves. 

In addition, analysts already expect strong revenue and earnings growth, and the company is focusing on verticals that appear to have plenty of room for change.