We came across a bullish thesis on Crexendo, Inc. (CXDO) on Ahead of the Curve’s Substack by Sam McColgan. In this article, we will summarize the bulls’ thesis on CXDO. Crexendo, Inc. (CXDO)’s share was trading at $5.27 as of Nov 11th. CXDO’s trailing P/E was 105.40 according to Yahoo Finance.
A telecommunications tower in a rural setting, showing the reach of cloud telecom services.
Crexendo ($CXDO) holds a dominant position in the Unified Communications as a Service (UCaaS) market, benefiting from strong industry growth, high-quality recurring revenue, and expanding margins. The company offers a cloud-based platform that integrates communication and collaboration tools, targeting enterprises and service providers. As the third-largest UCaaS provider, Crexendo has gained market share from competitors like Microsoft and Cisco, both of whom have de-emphasized their UCaaS offerings. The company’s platform is highly rated by users, with NetSapiens, its licensee-facing platform, achieving a retention rate of 99.8% and enabling cost savings of up to 40% for licensees. Crexendo’s user base has tripled since its acquisition of NetSapiens in 2021, reaching 5 million users as of August 2024.
With the UCaaS market projected to grow at a 10% annual rate in the U.S. and 15-20% internationally, Crexendo has a significant runway for expansion. Its international business, which is growing at 74% year-over-year, presents an especially strong growth opportunity, fueled by lower penetration compared to the U.S. Crexendo has successfully secured new clients in Europe, MENA, and APAC, and its gross margins have surged to 72%, up from around 50% in 2021, with further margin expansion anticipated from cost-saving initiatives, such as moving data center workloads to Oracle’s cloud by 2026.
The company’s balance sheet is stellar, with $15.5 million in cash, negligible debt, and significant net operating losses (NOLs) to offset future tax liabilities. This positions Crexendo to fund acquisitions, which are a key part of its growth strategy. The company targets acquiring up to two businesses annually, typically with revenues around $10 million, and expects these acquisitions to be accretive within 1-2 quarters, offering substantial cash flow margins over time.
Crexendo’s leadership team has a strong commitment to the company, with insiders holding a substantial 56% ownership stake. The largest shareholder, Steve Mihaylo, owns 42%, ensuring that management’s interests align closely with those of shareholders. This alignment has contributed to Crexendo’s careful yet steady growth trajectory. While some risks remain, such as cybersecurity threats or the unlikely event of Microsoft and Cisco re-entering the UCaaS market, these are considered to have a low probability of materializing.
A discounted cash flow (DCF) analysis points to an implied share price of $7.42, which suggests that the stock is undervalued by about 27%. Over the past year, volatility has pushed Crexendo’s beta to 1.15, which has, in turn, inflated the weighted average cost of capital (WACC) and slightly diminished the estimated intrinsic value. However, as performance stabilizes, the beta is expected to decline, which would positively impact valuations. Notably, this model does not factor in future mergers and acquisitions (M&A), which could potentially increase cash flow and enhance valuation.
Looking ahead, Crexendo’s non-GAAP earnings per share (EPS) could reach $0.90 by 2028. Based on a projected price-to-earnings (P/E) multiple of 25x, this could imply a share price of approximately $22.50 by 2027, offering a potential 300% return. Given Crexendo’s strong market position, stable recurring revenue, and ongoing M&A potential, it is an interesting candidate that investors should look at.
Crexendo, Inc. (CXDO) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 7 hedge fund portfolios held CXDO at the end of the second quarter which was 8 in the previous quarter. While we acknowledge the risk and potential of CXDO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CXDO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.