Z.ai: GLM 5
MEMORANDUM
TO: Investment Committee FROM: [Analyst Name] DATE: October 26, 2023 SUBJECT: LedgerLift (LLLT) – Short Recommendation
1) Recommendation
Recommendation: SHORT 12-Month Price Target Range: $25.00 – $30.00 (Base Case: $27.85)
Thesis: LedgerLift exhibits classic "growth trap" characteristics where the market is extrapolating historical hypergrowth while the forecast deceleration to sub-20% growth in FY27 and beyond fails to justify the current 9x EV/Revenue multiple. Even assuming a bullish operational turnaround, the intrinsic value remains below the current trading price, offering a favorable risk/reward to the downside.
2) Business Overview
LedgerLift is a pure-play B2B spend management and AP automation provider targeting the mid-market enterprise. The core value proposition is automating the " procure-to-pay" cycle, replacing legacy on-premise ERPs and manual workflows.
Why it Wins / Why Now:
- Sticky Product: The platform embeds deeply into client workflows (AP automation), evidenced by best-in-class Gross Retention (94%) and Net Revenue Retention (123%).
- Mid-Market Tailwinds: Mid-market enterprises are digitizing back-office functions to combat inflation and labor shortages, a structural tailwind that supported the 21% growth in FY25.
- Efficiency: The shift to 78% GM (driven by subscription mix) demonstrates scalable unit economics, though S&M spend (34% of rev) remains high.
3) KPI Quality Check
The Good:
- NRR (123%): Indicates strong land-and-expand motion; customers are increasing spend significantly.
- Gross Retention (94%): Very high for the mid-market, suggesting high switching costs.
- Concentration: Top 10 customers = 16% of revenue. This is a healthy diversification; no single customer loss is material to the thesis.
The Bad / What Could Be Wrong:
- ARPA ($132k) vs. Mid-Market: This ARPA seems high for "mid-market" definitions. It suggests LLLT may be serving the lower end of the enterprise market, where competition from SAP/Concur is fiercer, or they are bundling heavily discounted multi-year deals. If the customer base is actually "upper-mid-market," the TAM may be smaller than anticipated.
- Services Drag: Services GM is only 25%. While only 8% of revenue, this drags blended margins and suggests implementation complexity.
- CAC Payback (18mo): While acceptable, 18 months is not exceptional for a SaaS company trading at ~9x revenue. It implies the payback period is elongating if growth slows, threatening FCF generation.
4) Valuation: DCF Analysis (Base/Bull/Bear)
We utilized a 5-year Unlevered Free Cash Flow projection (2026–2030) to derive Enterprise Value.
Forecast Assumptions (Revenue & EBIT Margin):
| Metric | Case | 2026 | 2027 | 2028 | 2029 | 2030 |
|---|---|---|---|---|---|---|
| Rev ($M) | Base | 992 | 1,171 | 1,346 | 1,521 | 1,704 |
| Bull | 1,025 | 1,240 | 1,463 | 1,682 | 1,901 | |
| Bear | 951 | 1,075 | 1,193 | 1,312 | 1,430 | |
| EBIT Margin | Base | 20% | 22% | 24% | 25% | 26% |
| Bull | 21% | 24% | 26% | 28% | 29% | |
| Bear | 17% | 18% | 19% | 20% | 21% |
Unlevered FCF Calculation (FY2030 Terminal Year Example - Base Case):
- EBIT: $443m (26% margin)
- Less Cash Taxes (23%): ($102m)
- Plus D&A (2.5%): $43m
- Less CapEx (3.0%): ($51m)
- Less NWC (1.0% of incr): ($18m)
- Terminal UFCF: $315m
Valuation Output:
| Scenario | WACC / T. Growth | Terminal UFCF | EV ($B) | Equity ($B) | Implied Price |
|---|---|---|---|---|---|
| Base | 10% / 3% | $315m | $3.89 | $5.29 | $27.85 |
| Bull | 9% / 4% | $398m | $6.48 | $7.88 | $41.47 |
| Bear | 12% / 2% | $219m | $1.76 | $3.16 | $16.63 |
Note: Equity Value = EV + $1.4B Net Cash.
5) Comps Cross-Check
Peer Set:
- Peer A: 9.0x Rev / 35x EBIT
- Peer B: 7.0x Rev / 28x EBIT
- Peer C: 11.0x Rev / 42x EBIT
- Median: 9.0x Rev / 35x EBIT
Valuation Implied by Comps:
- Current Trading: LLLT FY2025E Revenue is $680m (NTM for current moment, or use FY26 NTM $992m?).
- Using FY2025 ($680m) as NTM proxy: EV = $680m * 9.0x = $6.12B. Equity = $7.52B. Price = $39.58.
- Using FY2026 ($992m) as NTM proxy: EV = $992m * 9.0x = $8.93B. Equity = $10.33B. Price = $54.37.
Adjustment: We apply a 20% discount to the median multiple (7.2x Rev). Rationale: LLLT’s growth is decelerating from 21% to 12% over the projection period, significantly slower than the high-growth peer set implied by the 9-11x range.
- Adjusted EV: $992m (FY26E) * 7.2x = $7.14B.
- Implied Price: ($7.14B + $1.4B) / 190m = $44.84.
Cross-Check Conclusion: While comps suggest the stock is fairly valued if it maintains premium multiples, the DCF reveals the structural overvaluation relative to cash generation. As growth decelerates, the multiple will compress, making the DCF the primary valuation anchor.
6) Catalysts, Risks & Triggers
Catalysts (Downside):
- Deceleration Shock: FY26 guidance likely to be set at ~18-20% growth, disappointing investors expecting a re-acceleration.
- Margin Miss: S&M spend (34% of rev) is elevated; if CAC paybacks extend due to macro tightening, Op Margin expansion will stall.
- Churn Tick-up: Even a 1-2% increase in logo churn (currently 6%) would severely impair the NRR engine and force a guide-down.
Risks (to Short Thesis):
- M&A Takeout: The $1.4B net cash and sticky customer base make LLLT an attractive tuck-in for larger ERP players (e.g., Oracle, Microsoft) at a 30-40% premium.
- AI Upside: Successful integration of GenAI for AP automation could expand TAM and margins, justifying a higher multiple.
- Multiple Support: The scarcity of high-NRR (123%) assets may keep the floor on the valuation higher than fundamentals suggest.
- Interest Rate Cuts: A macro pivot to lower rates disproportionately benefits high-multiple growth stocks.
- Short Squeeze: Low float or high borrow cost could trigger volatility.
What Would Change My Mind (Falsifiable Triggers):
- NRR > 130%: Sustained NRR expansion above 130% would indicate a product-led growth phase, validating higher multiples.
- Rule of 40 Score > 45: If LLLT demonstrates margin expansion >500bps while maintaining >20% growth, the growth-efficiency balance improves drastically.
- CAC Payback < 12 months: A significant reduction in payback period would signal a shift to efficient viral growth, altering the FCF trajectory.
7) Diligence Questions for Management
- Can you break down the $132k ARPA by cohort—how much is from new logo landings vs. expansion of existing accounts?
- Services gross margin is 25%; is this a loss-leader strategy, or are implementation costs structurally higher than peers?
- With S&M at 34% of revenue, what is the marginal ROI on sales spend, and has productivity per rep declined in the last 12 months?
- How much of the 123% NRR is price-driven vs. seat expansion vs. cross-sell?
- The top 10 customers represent 16% of revenue; have any of these customers signaled intent to in-source or renegotiate contracts in the next 12 months?
- What is the implied renewal rate for customers acquired during the 2021-2022 "growth at all costs" period?
- Capex is modeled at 3%; is this maintenance level, or are there significant data center/hosting investments required for the AI roadmap?
- How does the net cash position of $1.4B factor into capital allocation—do you anticipate M&A or buybacks, or is this purely a defensive buffer?
- Given the 18-month CAC payback, what is the specific trigger for the operating margin expansion to 26% by 2030?
- What is the competitive win-rate against legacy ERPs (SAP/Oracle) vs. modern best-of-breed competitors?