Company Name – Latent View Analytics Limited (Latent View) Current Share Price – INR 474 (Jan 29, 2024) Market Cap – INR 9,759 cr |
1. What is interesting about the stock?
The new oil is data. It is especially true in this day and age when we are consuming so much data. I looked at my monthly data consumption at home, which was over 900 GB. Yes, we have done a lot of streaming. A LOT!! From Kilo Byte data (1,000) in computers with dial-up networks to Giga Byte data (1,000,000,000) with broadband connections, we've come a long way. With so much data being created and consumed, it must be constantly examined in order to be tailored or relevant to each of us.
How does Netflix recommend shows to keep us bingeing?
Netflix makes heavy use of data analytics to encourage customers to binge on its programming. Here are a few examples of how they accomplish this:
Personalized Recommendations: Netflix leverages data analytics to provide personalized recommendations to each user. They amass massive amounts of information about user preferences, viewing history, ratings, and interactions. They can accurately offer material that corresponds with a user's interests by assessing this data. These recommendations increase the likelihood of users finding engaging content and continuing their binge-watching experience
Content Curation: Netflix curates material strategically based on data research. To detect trends and preferences, they evaluate viewership patterns, popular genres, and successful shows. This data-driven strategy assists them in selecting and producing original content that is more likely to resonate with users. Netflix boosts the likelihood of users spending more time on the platform by providing intriguing and binge-worthy shows.
Auto-Play: When an episode ends, Netflix uses an auto-play feature to start the next episode or suggest related material. This feature seeks to reduce the friction of manually selecting the next episode while keeping consumers immersed in the viewing experience. Netflix encourages viewers to binge-watch several episodes or even full seasons in one sitting by reducing the effort required to continue viewing.
User Engagement Analysis: In order to improve the user experience, Netflix closely monitors user engagement data. Data on viewing time, pause durations, rewinding, fast-forwarding, and episode completion rates are analyzed. This information gives Netflix insights into user behavior and preferences, allowing them to fine-tune its algorithms and interface. Netflix can improve binge-watching behavior by better understanding how consumers engage with their platform.
All this is done using data analytics.
The data analytics business opportunity is comparable to the IT opportunity in the late 1990s or early 2000s, which resulted in the rise of behemoths such as TCS, Infosys, and Wipro. India has a large pool of engineering talent with outstanding mathematical skills in a low-cost structure, making it ideal for capitalizing on the opportunity.
Latent View's initial public offering (IPO) in November 2021 had a massive response, with more than 325 times oversubscription. Only a few fortunate retail investors would have received an allocation.
Latent View is a pure-play data analytics startup. Customer, Marketing, supply chain, finance & risk, and HR services are the focused areas.
Business analytics and insights, data engineering, digital solutions, and data and analytics consultancy are all services offered by the company. It works with and serves blue-chip organizations in the technology (approximately 71% of Q3FY24 revenue), industrials (13%), consumer packaged goods and retail (9%), and financial services (8%) industries. It gets over 95% of its revenue from the United States. Adobe, Uber, and 7-Eleven are among the Company's key clients.
The market for pure-play analytics is severely fragmented. The industry trend indicates that mid-sized and large-sized multi-service providers are acquiring tiny pure-play analytics service providers to provide specialized analytics skills. Mu Sigma and Fractal Analytics, both of which are sponsored by private equity investors, are key players in India.
The worldwide data analytics industry is presently worth USD 174 billion, accounting for 6% of global IT spending, and is predicted to increase at an 18% CAGR between CY20 and CY24 to reach USD 332 billion.
Key strengths:
Relationships with blue-chip clients like Adobe and Uber
Industry tailwinds with an increase in digital investment by companies across sectors
Strong management team
Key weakness:
Intense competition with a lot of start-ups in the analytics space
Shortage and therefore, intense competition for high-quality talent
Client concentration with top 5 clients contributing around 63% of revenue. However, the clients are sticky
Slow organic revenue growth – driving the company towards inorganic growth
2. Key Historical Financials
Company delivered good revenue growth in FY22 and FY23 after a subdued FY21. Revenue growth has slowed in FY24
EBITDA margin came down from 34% in FY21 to 22% in Q3FY24 - management has guided towards an EBITDA margin of 25-28% in the long term
EBITDA margin has fallen due to higher payroll cost and operating expenses. Management had planned expenses for higher growth but that hasn't panned out
Cash flow conversion (CFO/EBITDA) was poor in FY23
ROE/ROCE has down from 23%/27% in FY21 to 17%/14% due to surplus cash in the books and lower margin
3. What is my view on company valuation?
On the first day of trading, the company's share price increased by roughly 150%. Bumper!! Following the listing, the stock rose even further. However, the stock price has recently been under pressure, having fallen over 50% since its first public offering.
Latent View trades at a P/E (TTM) multiple of 66x, whereas Infosys trades at a multiple of 28x. Infosys' long-term average P/E (TTM) multiple is about 25x, so even with the greater projected growth (20-25%), the current premium is not justifiable. With PEG ratio of 1.5x, the fair value multiple seems to be around 30x for the core business (profit of ~INR 100 cr in TTM) plus cash in hand.
Mu Sigma and Fractal Analytics are two of the company's main competitors. In the most recent round of fundraising, both were valued at a Price to Revenue multiple of 10-12x, compared to a business valuation of around 16x.
On any metric, the company is very highly-priced, and it may face a situation similar to Infosys after the dot-com disaster when it took 6 years for investors to recover their invested capital - a lengthy correction in the stock.
Promoter shareholding has also fallen from 67.2% in September 2022 to 65.4% in December 2023. Since December 2021, institutional shareholding (FII and DII) has decreased, which is not a healthy indicator.
4. What are the risks to the investment analysis?
Key risks to the analysis are:
FOMO and lack of options (until a competitor is listed) may drive the price higher in the short/medium term
Acquisition by a large player at a high valuation – for entry into the space or to complement the current product portfolio
Blockbuster product development by the company
About the Author
Stock market enthusiast.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.