Model N Stock: Strong Tailwinds Bode Well for Long-Term Gains

Model N Stock: Strong Tailwinds Bode Well for Long-Term Gains
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Model N: Revenue Solutions in High Demand

In my ongoing search for high-prospects, small-cap technology stocks, my screens yielded Model N Inc (NYSE:MODN), a developer of cloud solutions that help companies maximize their revenue flow. By doing so, companies can deliver improved profitability and cash flow, and in the process, drive their stock prices higher.

Model stock had been stalling in 2018, but seven weeks into 2019, MODN stock has been rallying and is up an impressive 26.7%.

The company has a global footprint with sales in over 120 countries. Its client base comprises of small to large companies in areas such as pharmaceutical, medical device, high technology, manufacturing, and semiconductors.

On the Model stock chart, MODN stock has gone from trading at a 52-week high of $20.33 in July 2018 to plummeting to a range low of $12.60 in November 2018 after a death cross surfaced.

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Since the low, MODN stock has rallied 22.5%, easily outperforming the S&P 500, and is looking to retake $20.00 and $25.00.

Chart courtesy of StockCharts.com

The Fundamental Bull Story for MODN Stock

Model reports in a fiscal year ending on September 30.

From 2015 to 2018, Model N Inc has seen growth in each fiscal year. Revenues have nearly doubled from $81.76 million in fiscal 2014 to $154.63 million in fiscal 2018.

Fiscal Year Revenue (Millions) Growth
2014 $81.76
2015 $93.77 14.7%
2016 $106.97 14.1%
2017 $131.17 22.6%
2018 $154.63 17.9%

(Source: “Model N Inc.,” MarketWatch, last accessed February 19, 2019.)

There is some concern as Model is expected to see its revenue growth rate fall 9.5% to $140.5 million in fiscal 2019 but rally 10.8% to $156.9 million in fiscal 2020. (Source: “Model N, Inc. (MODN),” Yahoo! Finance, last accessed February 19, 2019.)

Model has yet to turn positive earnings before interest, taxes, depreciation, and amortization (EBITDA), but it delivered adjusted profits and positive free cash flow (FCF) in fiscal 2018.

The EBITDA loss narrowed to a five-year low in fiscal 2018. We could see a positive reading by fiscal 2020.

Fiscal Year EBITDA (Millions)
2014 -$16.65
2015 -$15.06
2016 -$26.81
2017 -$28.23
2018 -$12.48

(Source: MarketWatch, op cit.)

The generally accepted accounting principles (GAAP) diluted loss came in at a three-year low in fiscal 2018.

Fiscal Year GAAP Diluted EPS
2014 -$0.86
2015 -$0.75
2016 -$1.21
2017 -$1.38
2018 -$0.93

(Source: Ibid.)

Model did manage to report an adjusted profit of $0.04 in fiscal 2018 with estimates calling for profits to rise to $0.09 per diluted share in fiscal 2019 and as high as $0.23 per diluted share in fiscal 2020. (Source: Yahoo! Finance, op cit.)

Free cash flow turned positive in fiscal 2018 after four straight years of negative FCF.

Fiscal Year Free Cash Flow (Millions)
2014 -$8.27
2015 -$13.38
2016 -$15.50
2017 -$12.69
2018 $2.27

(Source: MarketWatch, op cit.)

Analyst Take

The bull thesis for Model stock is supported by what will likely be rising demand for revenue management solutions.

Model is delivering strong fundamentals that should help lift MODN stock higher.

Insiders at Model are also actively buying shares—a bullish sign. Over the past six months, insiders bought a net 1.19 million shares of MODN stock. (Source: Yahoo! Finance, op cit.)