My price target for Real Page (RP) for 2014 is $16.75 which is about 25% lower than the recent closing price $22.17 on December 16th.
With its 2010 IPO, this Texas-based software distributor capitalized fairly well on its massive market share. Since 2002, Realpage had won praise from some analysts for its custom property management software. Besides providing on-demand software, the company also sells value-added services for a wide variety of property managers.
Although RealPage achieved great things in the past, the company is now struggling to maintain it's growth rate to justify a 76.45 P/E multiple, 3.10 PEG, 4.54 P/S, and 5.53 P/B while not paying shareholders any dividends. See Finviz.Com
The well respected Off Wall Street Consulting Group has the stock rated a sell with a price target of $11. In the face of repeated stock downgrades including recent downgrades by Credit Suisse and Deutsche Bank who were the joint bookrunners and lead underwriters on the company's IPO , the company faces an uphill battle to maintain growth investor confidence.
At Realpage, structural problems are so entrenched that it is hard to picture a successful rally in it's stock price during 2014. Over the past few quarters, Realpage has reported consistently deteriorating quality in its reported earnings per share. Deutsche Bank analyst Nadan Amladin stated in his report that "First, our analysis of sales rep productivity shows productivity has been roughly flat the last 2 years, and we don't expect this metric to materially to improve the next 2-3 quarters, given strong pace of recent hiring (QCRs up 28% in 1Q13). Also, we believe most of recent hiring has been around small-medium sized property managers, which will likely prove to be a drag on average ACV's."
"Accounting" Issues That Real Page Investors Must Consider
Based on RP's latest 10-Q which readers can reviewed in detail here, it appears to us that Real Page's management is all of a sudden adding "other deferred revenue" to "acquired deferred revenues".
As a former C.P.A., I have never been comfortable with "Non-GAAP" reporting to shareholders of public companies. Investors may be wise to focus on Generally Accepted Accounting Principles financial results when considering the reported financial results of Real Page.
Insiders Bail Out 42 Times During The Past Six Months.
Management continues to be promoters of a massive growth opportunity but we believe that organic growth is already declining and that RP's competition is far more successful and aggressive in getting new customers that management admits. See RP Call transcript
Insiders remain heavy sellers of Real Page common shares. These sales include many shares held by their major French venture capital firm and the company's president, Stephen T. Winn. These sales have been ongoing and have continued since RP reported their third quarter results. The following table presents a very stark picture:
|Net Share Purchase Activity|
Stock Performance Over The Past Two Years
If the latest rumblings from Wall Street are correct, Realpage's disastrous run may continue into 2014. Over the past two years the Nasdaq index has appreciated over 50% while RP's common stock has fallen about 18%. Clearly, Realpage wasn't able to build on its early promise for its public shareholders.
Unfortunately, Realpage's basic business model looks highly suspect. The property management market is so well penetrated that long-term sales declines could be the new order of the day for Realpage and similar companies that compete with RP.
We believe the company did have a strong business model at one time but Realpage's IPO came too late to take advantage of bullish years in the property management industry. Despite the company's poor long-term stock performance, RealPage's stock did briefly climb six percent after its third quarter earnings in November but has since dropped back into the low 20's as insiders continue to sell their shares.
Market realities just don't look promising in the property management industry. Since Realpage already serves over 40% of property managers, the company has little room to expand its customer base. Furthermore, property management itself is a field that is experiencing virtually no growth. According to analysts, the industry has experienced a growth rate of 0.7% over the past five years. This is hardly the kind of growth that typically excites Wall Street mavens and bargain-hunting investors.
The Realpage story is another testament to the importance of timing your IPO correctly. If the company had gone public in 2008 or earlier, it might have raised princely sums from investors who were still keen on all investments related to property and real estate. By 2010, the investing public had already experienced one too many real estate disappointments. Add inherent weakness in RP's target market and you have a recipe for stagnation. RealPage's past performance and future prospects are equally suspect. Fortunately, the company is managing its decline so that investors have some time to react and adjust their stock position.
To be sure, the executives at RealPage are discussing plenty of plans for rejuvenating their business through expensive acquisitions. However, it is hard to envision a truly satisfactory solution to over saturation in RealPage's target market. Yardi is the second-largest property management service provider and RealPage's largest competitor. Together, Yardi and Realpage own seventy-five percent of their market.
Real Page also faces competition from AppFolio at the lower end of the market. Realpage also faces competition in certain categories from competitors that make enterprise and financial software, including Oracle (ORCL), SAP (SAP), Salesforce.com (CRM) and Intuit (INTU). This type of saturation and competition just isn't compatible with respectable future growth and healthy earnings for stockholders of RP.
Changes in Industry
RealPage's situation is further complicated by the fact that the company has traditionally banked on servicing multi-family units. As many experts have noted, growth in multi-family dwellings is stagnant. In spite of rampant mortgage foreclosures and growth in demand for multi-unit buildings, zoning ordinances and other laws haven't changed widely to make multi-family dwellings more practical.
Hopefully, more municipal governments will change their ways to make multi-family residences more practical. However, it isn't clear these changes will come fast enough to transform RealPage's ailing fortunes.
Also, as the economy continues to improve and individuals are able to get mortgages at favorable rates, we will continue to see a shift from renting to owning a home. We still believe it is the American dream to own your own house in the United States.
Growth oriented and aggressive investors should consider taking profits in Real Page today.
RP is currently Shortable and Optionable (source- Finviz.com).