Voss Capital, LLC an investment management company, released its first-quarter 2024 investor letter. A copy of the letter can be downloaded here. Voss Capital’s funds, Voss Value Fund, LP, and the Voss Value Offshore Fund, Ltd returned +9.2% and +9.0% to investors net of fees and expenses respectively, in the first quarter compared to a +5.2% return for the Russell 2000 Index, 2.9% return for the Russell 2000 Value Index, and +10.6% return for the S&P 500 Index. The fund’s total gross exposure stood at 167.8% and the net long exposure was 92.9% at the end of the first quarter. The weight of the fund’s top 10 longs was 81.1% and the top 10 shorts was 24.2%. In addition, you can check the top 5 holdings of the fund to know its best picks in 2024.
Voss Capital highlighted stocks like SolarWinds Corporation (NYSE:SWI) in the first quarter 2024 investor letter. SolarWinds Corporation (NYSE:SWI) is a provider of information technology (IT) management software products. SolarWinds Corporation’s (NYSE:SWI) one-month return was -1.86%, and its shares gained 22.54% of their value over the last 52 weeks. On May 31, 2024, SolarWinds Corporation (NYSE:SWI) stock closed at $11.58 per share with a market capitalization of $1.948 billion.
Voss Capital stated the following regarding SolarWinds Corporation (NYSE:SWI) in its first quarter 2024 investor letter:
“SolarWinds Corporation (NYSE:SWI) provides software solutions in network, application, and database management, with modern parlance labeling its solutions as “observability.” In simple terms, SolarWinds helps businesses keep their computer networks running smoothly and securely. The company is engaged in a transformation from a pure license/maintenance provider selling on premise software to a subscription model with both a hybrid cloud and private cloud solution. Even as it battles the headwind of lost upfront (100% margin) license sales to ratable subscription revenue, revenue growth has begun to accelerate with margins rising concurrently, as they have hit “scale” with their subscription initiative. SWI is an extremely high margin business (approaching 50% EBITDA margins, with 90% gross margins) with accelerating ARR growth (now above 7%) that gets over a 50 in software “Rule of 40” parlance, yet it trades for only ~9x FCF, easily the cheapest software stock over $1 billion in market cap that we are aware of. With that designation, one would think they have routinely disappointed, however SWI has consistently beaten expectations and had massively positive revisions (2024 EBITDA estimates have gone from $317 million to $375 million over the past year). To reiterate, it is very unusual for a company to have accelerating revenue growth, margin expansion (e.g., Voss Sauce), and significantly positive earnings revisions scraping the bottom of the valuation barrel. We attribute the apparent dislocation to unconditional sell side apathy as well as the company’s very public cyber-attack, which was over three years ago and no longer an issue for customers (evidenced by their maintenance retention rate improvement from 90% to 95%).
The company recently paid a ~10% special dividend, which moderately (and temporarily) increased its leverage. In our base case, we assume 75% of cash flow goes to debt paydown over the next year and the stock is worth ~$23/share (92% upside), or 14x FCF. This would be a >50% discount to direct comp NABL that has half the margins and a similar growth rate, or a similar multiple to TDC, another “legacy” software company going through a subscription conversion. With two large private equity holders still in the name, we think the odds are elevated that the company will receive a buyout offer from a different PE fund within the next year or so.”
A systems administrator sitting at their desk surrounded by computer monitors, overseeing a complex infrastructure.
SolarWinds Corporation (NYSE:SWI) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 20 hedge fund portfolios held SolarWinds Corporation (NYSE:SWI) at the end of the first quarter which was 21 in the previous quarter.
The first quarter revenue of SolarWinds Corporation (NYSE:SWI) was $193 million, an increase of 4% year-over-year. Also, the ARR increased by 7% in the quarter. In addition, please check out our hedge fund investor letters Q1 2024 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.