On Wednesday, BofA Securities updated its analysis of E2open Parent Holdings (NYSE: ETWO), assigning an Underperform rating to the stock and setting a price target of $4.50. The coverage, which had been paused, was resumed following a period of observation after the company's board announced a strategic review on March 7, 2024.
The analyst noted that since the announcement of the strategic review, ETWO's shares have been trading at 10-11x EV/EBITDA, which is consistent with the range prior to the announcement. This observation suggests that the market has not priced in a significant takeover premium for the company's shares.
Elliott Management, an activist investor, currently holds 27.3 million shares of ETWO, which represents 9% of the total shares outstanding, according to the most recent filings. The analyst pointed out that the stock's price movement has been influenced by earnings surprises and revisions, such as an increase after the fourth quarter of fiscal year 2024's earnings beat and a decrease following a miss in the first quarter of fiscal year 2025.
The decision to downgrade the stock from No Rating to Underperform is based on the performance of the shares, which seem to be trading more on fundamentals rather than speculation about potential acquisition outcomes. The $4.50 price target is derived from applying a 10x multiple to the company's estimated calendar year 2025 EBITDA, which is a discount compared to the 26x average of its peers.
The rationale behind the discounted valuation includes several factors. The analyst cites revenue declines, higher financial leverage, and below-peer margins as key reasons for a more cautious outlook on E2open Parent Holdings, suggesting these issues justify a lower valuation relative to the company's peers in the industry.
In other recent news, E2open Parent Holdings has experienced a revenue miss for Q1 of fiscal year 2025, leading UBS to adjust its outlook on the company's shares and reduce the price target to $4.20. Despite the revenue shortfall, E2open maintains its full-year revenue guidance for fiscal year 2025, indicating potential sequential revenue growth in the second half of the year. The company anticipates improvements in customer churn and retention, with churn rates expected to have peaked in Q1.
Furthermore, E2open has exceeded its internal Annual Recurring Revenue (ARR) retention targets for Q1 FY '25 and aims for further reductions in churn. The company's full-year subscription revenue is projected to be between $532 million and $542 million, with total revenue for FY '25 expected to be within $630 million to $645 million.
UBS remains cautious, suggesting that E2open's current outlook leaves little room for additional macroeconomic downturns or further execution challenges. The professional services revenue miss indicates that E2open may still be facing operational difficulties. However, despite Q1 deal closures delays, E2open managed to close nearly half of the delayed Q1 deals in Q2, indicating recent developments in the company's business operations.
InvestingPro Insights
Recent data from InvestingPro adds context to BofA Securities' analysis of E2open Parent Holdings (NYSE: ETWO). The company's market capitalization stands at $1.41 billion, with a price-to-book ratio of 0.97, indicating that the stock is trading close to its book value. This aligns with the analyst's observation that the market has not priced in a significant takeover premium.
InvestingPro Tips highlight that ETWO is not profitable over the last twelve months, which supports the analyst's concerns about the company's financial performance. However, analysts predict that the company will be profitable this year, suggesting potential for improvement. The company's revenue for the last twelve months was $625.6 million, with a gross profit margin of 65.8%, although revenue growth was negative at -4.04%.
These insights complement the analyst's rationale for the discounted valuation, particularly regarding revenue declines and below-peer margins. For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and metrics to further evaluate ETWO's financial health and market position.
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