Today we have a moderately speculative idea.: take shares in pharmaceutical research software maker Simulations Plus (NASDAQ: SLP), to capitalize on the growth in demand in his field of activity.
Growth potential and validity: 28% behind 14 Months; 12% per year for 10 years.
Why stocks can go up: the company's customers are very active and SLP should get something from this.
How do we act: take now 60,95 $.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
If you want to be the first to know, did the investment work?, subscribe: as soon as it becomes known, we will inform.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark: as with the investment idea as a whole, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
What the company makes money on
The company makes software and provides services in the field of scientific research. In general, it is focused on drug development by pharmaceutical companies., although she has clients from a purely scientific field.
The company's revenue is divided into the following segments.
Software — 59%. Segment gross margin — 88% from its proceeds.
This is the sale of licenses to use the company's programs. According to the annual report, she has a lot of suggestions, but the main money in the segment is given by the following sets of programs:
- Gastroplus - programs for simulating the effects of drugs, produced for people and animals 56% proceeds;
- Monolix - Software for the analysis of the parameters of various drugs, as well as for modeling clinical trials - 19% proceeds;
- ADMET Predictor - Molecular Analysis Software powered by Machine Learning - 17% proceeds.
Services — 41%. Segment gross margin — 78% from its proceeds. These are consulting services: SLP representatives work on customer projects, usually one of the world's major pharmaceutical companies in drug development. Segment revenue is divided into the following types of work:
- pharmacokinetic and pharmacodynamic modeling — 52%;
- quantitative systems pharmacology and quantitative sensory testing - 29%;
- physiologically based modeling of pharmacokinetics - 19%.
The geographical distribution of the company's revenue is calculated as horribly as possible - not by country, and by region: America give 71,3% proceeds, 14,63% give Asian countries, 14,07% belongs to Europe.
However, Considering, that the company's customers are R&D departments, and in this area, budgets are very stable, can't be too scared, that the growth of the dollar will greatly spoil the SLP sales.
Arguments in favor of the company
Well done. Essentially, here are the same prerequisites, same as Veeva Systems: Pharmaceutical companies are motivated to spend huge amounts on R&D, so they have new drugs after patents expire. Actually, This can also be seen in the financial results of the company.: SLP revenues are growing.
The company is also very inexpensive in absolute terms.: capitalization $ 1.22 billion. Considering, that it works at the junction of segments surrounded by a halo of "prospects" - IT and biotech, - we can hope, that quotes will help pump the crowd of retail investors.
Revenue and profit, million dollars, total margin as a percentage of revenue - by year
| Revenue | Net income | Total margin | |
|---|---|---|---|
| 2017 | 24,14 | 5,79 | 23,98% |
| 2018 | 26,67 | 8,93 | 30,12% |
| 2019 | 33,97 | 8,58 | 25,27% |
| 2020 | 41,59 | 9,33 | 22,44% |
Revenue
2017
24,14
2018
26,67
2019
33,97
2020
41,59
Net income
2017
5,79
2018
8,93
2019
8,58
2020
9,33
Total margin
2017
23,98%
2018
30,12%
2019
25,27%
2020
22,44%
Report well. The other day, SLP released a report for 2 neighborhood 2021 - and he was good. Compared to the same period in 2020, revenue increased by 27%, and profit - by 49%. Earnings per share came out slightly better than expected, And, given the positive environment, amazingly, that these shares did not rise after the report. Well,, so much the better for us: you can take them now in anticipation of further growth.
Revenue and profit, million dollars, total margin as a percentage of revenue - by quarters
| Revenue | Net income | Total margin | |
|---|---|---|---|
| 3 neighborhood 2020 | 12,30 | 2,94 | 23,87% |
| 4 neighborhood 2020 | 9,54 | 2,19 | 22,94% |
| 1 neighborhood 2021 | 10,70 | 2,48 | 23,17% |
| 2 neighborhood 2021 | 13,15 | 3,21 | 24,42% |
Revenue
3 neighborhood 2020
12,30
4 neighborhood 2020
9,54
1 neighborhood 2021
10,70
2 neighborhood 2021
13,15
Net income
3 neighborhood 2020
2,94
4 neighborhood 2020
2,19
1 neighborhood 2021
2,48
2 neighborhood 2021
3,21
Total margin
3 neighborhood 2020
23,87%
4 neighborhood 2020
22,94%
1 neighborhood 2021
23,17%
2 neighborhood 2021
24,42%
Earnings per share in dollars
| Expectation | Result | |
|---|---|---|
| 3 neighborhood 2020 | 0,10 | 0,20 |
| 4 neighborhood 2020 | 0,09 | 0,11 |
| 1 neighborhood 2021 | 0,11 | 0,12 |
| 2 neighborhood 2021 | 0,14 | 0,15 |
| 3 neighborhood 2021 | 0,18 | — |
Expectation
3 neighborhood 2020
0,10
4 neighborhood 2020
0,09
1 neighborhood 2021
0,11
2 neighborhood 2021
0,14
3 neighborhood 2021
0,18
Result
3 neighborhood 2020
0,20
4 neighborhood 2020
0,11
1 neighborhood 2021
0,12
2 neighborhood 2021
0,15
3 neighborhood 2021
—
Can buy. The company may well become an object of purchase by someone larger.. According to Simulations Plus, 93% customers renew contracts for the use of the company's software. It also has a growing number of orders in the service segment.. Since the company is not worth very much in absolute terms, then buying it would be a perfectly reasonable decision.
Average revenue per user of the company's software , one thousand dollars
| All businesses | Commercial enterprises only | |
|---|---|---|
| 2019 | 45 | 59 |
| 2020 | 49 | 67 |
| 2021 | 71 | 97 |
All businesses
2019
45
2020
49
2021
71
Commercial enterprises only
2019
59
2020
67
2021
97
The total number of the company's projects in the services segment by types
| 2019 | 2020 | 2021 | |
|---|---|---|---|
| Pharmacokinetic or pharmacodynamic modeling | 44 | 53 | 73 |
| Quantitative Systemic Pharmacology and Quantitative Sensory Testing | 15 | 27 | 19 |
| Physiologically Based Pharmacokinetic Modeling | 36 | 37 | 47 |
| All in all | 95 | 117 | 139 |
Pharmacokinetic or pharmacodynamic modeling
2019
44
2020
53
2021
73
Quantitative Systemic Pharmacology and Quantitative Sensory Testing
2019
15
2020
27
2021
19
Physiologically Based Pharmacokinetic Modeling
2019
36
2020
37
2021
47
All in all
2019
95
2020
117
2021
139
What can get in the way
Mind the concentration. According to the report, the company has three major clients: one has 9% proceeds, for the other two 7%. Reconsideration of relations with one of them may negatively affect the reporting of SLP.
Wrecked. The company pays 0,24 cents per share per year, which with the current value of the shares gives 0,39% per annum. It costs SLP about $5.04 million a year to do this - 54% its profits. Money at the disposal of the company, certainly, enough: 42,385 million dollars on accounts and 11.3 million debts of counterparties.
Debt is under control: 14,272 million in arrears, of which 6.541 million must be repaid during the year. By idea, there should be enough money for everything, but there are force majeure circumstances, And, may be, the company will cut the payments, if need be. From this, stocks will fall due to the exodus from them of supporters of the point of view "money should work". Although, On the other hand, the company pays such a penny, that it might not matter.
Price. Company P / E in the area 120. It's not so terrible: in a huge number of biotech- and IT companies have no profit at all, and if she was, then P / E there would be in the thousands. Against this background, SLP does not look very brazen. However, it is worth bearing in mind the possibility, that SLP stock will shake.
However, I don't think, what a big P / E will scare off a potential buyer of the company: huge corporations regularly buy less efficient businesses for insane billions, who generally suffer losses for years.
What's the bottom line?
We take shares now by 60,95 $. And then there are two options:
- wait, when will the shares be worth 78 $, and sell them. This is much less than the historical maximum in 89,5 $, achieved in February 2021. Considering all the arguments for, this is an achievable goal for the next 14 Months;
- keep shares next 10 years. Over longer periods, the probability of buying this business increases noticeably.
