Weave Communications: Severe Miscommunication

Summary

  • Weave has seen dreadful share price performance since the public offering roughly half a year ago.
  • Its kind of business, or better said stock, has gone out of fashion, as losses show no sign of narrowing in a meaningful way.
  • Despite the huge decline in the share price, I am not lured yet to the shares, as the quality of the business and lack of profitability create continued concerns.
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When Weave Communications, Inc. (NYSE:WEAV) went public in November of last year, I concluded that the discount looked compelling, yet concerns outweighed any appeal at the time.

I noted that the company has seen a soft public offering. While that usually is attractive, the business is operating in a very competitive field while the company continues to incur sizeable losses. That combination prevented me from getting involved with the shares at the time.

Disappointment In The Making

Weave Communications has a mission to enable small businesses to unify, modernize, and personalize customer interaction. The basic idea is that unified communications create meaningful customer interactions. The platform is all about attracting, retaining, engaging, and communicating with customers through reviews, email marketing, assistance, analytics, scheduling, messaging, chatting, and phone calls, among other functions.

The positioning in itself makes sense, as small- and medium-sized businesses are the most prevalent form of business, yet they face the hardest challenge in adapting their business to the new digital world that is navigated through smartphones. At the same time, consumers require personal treatments, and these corporate customers require aid with their transformation. At the time of the offering, the company has some 130,000 corporations as customers, with some 13 million interactions with customers taking place each day.

The company was set to go public in a preliminary price range between $25 and $28 per share, with final pricing set at $24 per share. With nearly 63 million shares outstanding, the company was awarded a $1.5 billion equity valuation, which includes a roughly $150 million net cash position. This more than $1.3 billion operating asset valuation was applied to a business which generated merely $46 million in sales in 2019, on which a huge $32 million operating loss was reported.

Sales jumped 75% to $80 million in 2020, on the back of the pandemic, and while relative operating losses narrowed a bit, absolute operating losses increased to $40 million. Revenues were up 55% in the first half of the year to $54 million, for a run rate comfortably in excess of a hundred million. Operating losses came in at nearly $23 million for the six-month period, marking very modest relative operating leverage, not far enough to be impressive, with losses increasing in absolute dollar terms.

While the company guided for third quarter sales of $30 million, the company actually anticipated some deleveraging. This resulted in a business which generated $120 million in annualized sales, working down to an 11 times sales multiple. While 50% growth rates were solid, it was driven by the pandemic, as realistic losses were very substantial. Even as shares fell to $18 on the first day of trading, reducing the sales multiple to 8 times, I still found myself being very cautious.

All Down From Here

In the time frame of just six months, shares of Weave have been decimated, now trading at just $4 and change, down 80% from the offer price. In December, the company posted third quarter results in line with expectations, as revenues came in at $30.3 million, accompanied by a substantial $13.9 million operating loss.

Early in March, the company posted its fourth quarter results, with revenues up just 34% to $31.8 million. Operating losses narrowed slightly on a sequential basis to $13.6 million. By now, shares have fallen to the mid-single digits, as the results were underwhelming, but this certainly applied to the guidance. This came as the company guided for 2022 sales at a midpoint of $138 million and non-GAAP losses at $38 million. Note that this compares to a $10.6 million non-GAAP loss in the fourth quarter of 2021, indicating that 2022 is going to be more of the same as 2021, creating few reasons to get upbeat.

Shares actually saw a brief bump higher to $5 early in May, as the first quarter results were a bit stronger than guided for. First quarter sales rose 30% to $33.3 million as GAAP operating losses were stable at around $13.5 million. On the back of the relatively stronger quarter, the company hiked the full year sales guidance to $140.5 million which is relatively strong, given the market conditions, while the pandemic is on its retreat of course. We recognize that the company is a beneficiary of the pandemic.

With shares down to just $5 here, the company is now valued at a mere $325 million, which includes a $112 million net cash position, revealing that operating assets trade at just over $200 million, at roughly 1.5-2.0 times annualized sales. Unfortunately, that is not too indicative, given the much more modest growth and continuation of losses, with relatively little progress here.

Not Lured

While the thesis is impacted in a major way by the valuation, the reality is that the quality of the business and its profitability in the long term are key to create a compelling investment.

Based on the performance displayed since the public offering, I am not too happy with that performance, as the losses are substantial by all means. I am not absolutely convinced that the company's products are a long-term quality solution, with changes in the companies providing transformation solutions themselves changing rapidly as well.

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This article was written by

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The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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