Kahoot: Looking At Q3 And Beyond

Summary

• We continue to believe that Kahoot and its unique business model represent a great opportunity.
• Kahoot is committed to developing a truly global learning platform reaping the benefits of the trends reshaping the education industry further to the pandemic.
• Kahoot business is still in its early stage, and the company is committed to deploying capital to scale up its business.
• Our valuation delivers USD 9.3 per share with a sensitivity range between USD7.4 and USD12.3 per share.

Yagi-Studio/E+ via Getty Images

Investment thesis

We continue to believe that Kahoot (OTCPK:KHOTF) represents a unique opportunity still under the radar, especially for US investors.

Q3 is expected to confirm the recent growth trends and the integration of recent acquisitions within the overall business model. Kahoot is committed to creating an ecosystem able to scale up thanks to a self-feeding mechanism where satisfied users (students, teachers, workers, and companies) drive viral growth and make Kahoot market larger and larger.

Contents are generated by users (for example, teachers) and then eventually monetized. This is a unique feature that can create the viral growth mentioned above. It allows Kahoot to command an impressive revenue to FCF conversion once the company completes the capital deployment and integrates its recent acquisitions.

Investors should bear in mind that the Kahoot business model is unique. The critical issue is whether this company would be able to scale up its business. We believe Kahoot's strategy of integrating its four business lines and creating a genuinely global ecosystem is consistent with the scalability of its business model.

Our valuation delivers USD 9.3 per share with a sensitivity range between USD 7.4 and 12.3 per share (see following tables). We are fully aware of the limits implied in such DCF valuation. That's why we invite investors again to emphasize the overall Kahoot value proposition rather than on Q3 specific figures. Multiples and peer comparisons make little sense at this stage.

Kahoot, in our view, might be not only the world's leading educational platform but a fully integrated ecosystem and a potential target for big tech names involved in the educational business.

A recap on Kahoot universe

Kahoot is committed to developing a truly global learning platform reaping the benefits of the trends reshaping the education industry further to the pandemic, relying more and more on digital content. On this backbone, Kahoot is expanding its platform to serve not only 9mln teachers and hundreds of mln of students but also parents and corporations.

Kahoot has a Saas (software as a service) model to share its contents, and this is the critical issue behind Kahoot's value proposition, which should make it attractive for investors. Its Saas model generates millions of interactions that are laying the foundations of its ecosystem. This model is basically self-feeding and makes Kahoot ecosystem scalable. Its total addressable market is growing faster than expected. This is what investors should be focused on: the reliability of a unique, defensible, and scalable business model in its core four areas:

1. Kahoot At Home with free content and premium ones available on subscription;
2. Kahoot At School is suited to increase engagement in the classroom and to combine with the launch of new initiatives (DragonBox and Whiteboard);
3. Kahoot At Work designed for professional training with the support from Actimo and Motimate;
4. Kahoot Academy aimed at connecting the 9 mln teachers relying on the platform with other actors in the Kahoot ecosystem.

Less emphasis should be put on Q3, although recent trends should be confirmed

At the end of Q2, active accounts were 29 mln, school subscriptions were 295K, at Work were 403K, and At Home were 234K. Paid subscriptions topped 933K (Motimate brought 140K) with invoiced revenue at USD 20.6 mln. Adj. Cash flow from operations was USD 5 mln implying 24% cash conversion of invoiced revenue. Adj. EBITDA reached USD 4.2 mln (23% EBITDA margin). The available cash was USD 440 mln.

Consensus on Q3 on revenues points to around USD 25 mln, while on EBITDA, there is a considerable discrepancy between the highest (USD 5 mln) and lowest (USD - 2 mln) estimate. The expected net loss falls in a wide range between USD 10 mln and USD 3 mln.

Q3 expected results

Source: Bloomberg as of October 30, 2021

We believe it is not the case to put great emphasis on Q3 EBITDA and net loss. Kahoot business is still in its early stage, and the company is committed to deploying capital to scale up its business. Kahoot's cash position is healthy enough to support its expansion strategy, and, in our view, more attention should be put on the implementation of Kahoot strategy and its scalability.

Valuation

We leave our DCF valuation unchanged for the time being, relying on a 10% hurdle rate and 3.5% terminal growth and assuming USD 30 mln CAPEX per year in the future despite modest D&A. We have also factored in a modest negative contribution from change in working capital.

Our valuation delivers USD 9.3 per share with a sensitivity range between USD 7.4 and 12.3 per share (see following tables).

We are fully aware of the limits implied in such DCF valuation. That's why we invite investors again to emphasize the overall Kahoot value proposition rather than on Q3 specific figures.

We remember that all successful growth stories have gone through unsuccessful reporting sessions, which have been overstressed as street analysts tend to measure company performance in the short term rather than focus on implementing the overall strategy.

Source: Moat Investing

Sensitivity Analysis

Source: Moat Investing

Conclusions

We reiterate our idea that Kahoot might be the world's leading educational platform and a fully integrated ecosystem that might also be appealing for big tech names in the educational market (we are thinking about Google (GOOG) (GOOGL)). Kahoot's network and ecosystem might be, in our view, an acquisition target for big tech names.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of KHOTF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Investing For The Future]

Thoughts on continued shareholder dilution? Will it stop or continue in 2022 and beyond? It seems European companies, in particular in Scandinavia, tend to pull this kind of tactic. I cannot find any mention of it in the past 6 earnings call transcripts in the presentation or Q/A - you'd think they'd address it.

[Watblieft]

Love Kahoot, thank you for sharing your thoughts.

One of the only (or THE only?) profitable e-learning business. Strong growth, making money, good management. Low insider ownership though.

Would invest in an heartbeat, if the valuation wasn't so high though.

[antoniotrading]

@Watblieft kahoot at those prices is a gift , valuation is not high at all , this is like a sas buisness free cash flow to ebitda is 95%, this company will generate very high cash flow one day

[jonathanfield]

Thanks for the analysis. It would be helpful to hear more about their management as that’s critical to success to a growth brand like Kahoot. Equally important/helpful are any insights into the internal work/employee culture. I sit on the sidelines till I understand those elements.