H.C. WAINWRIGHT / NEXCF: BUY, $0.50 PT -
Nextech3D.AI Corporation
NEXCF: Price: $0.09; Market Cap (M): $12 - Rating: Buy; Price Target: $0.50 -
Scott Buck
Modeling Demand Remains Robust, Licensing Opportunity and Gross Margin Guide Potential Catalysts; Reit. Buy, $0.50 PT.
Results largely as expected, gross margin the story in 2024. After the market close on April 29, 2024 NexTech3D.ai reported year-end 2023 operating results, which were largely consistent with the company’s preliminary results, released in February 2024. The company reported 2023 revenue of C$5.0M, which compared to our C$5.3M estimate but reflects more than 56.0% growth from 2022 levels. Revenue growth continues to be driven by increasing demand for 3D models across multiple industry verticals. Importantly, the company provided gross margin guidance which included an 80.0% margin by 2Q24, up from almost 30.0% in 2023, as the company benefits from moving its 3D modeling operations to India in 2023. The company continues to see elevated levels of demand for its 3D models, including a C$1.8M agreement signed in February 2024 for delivery later this year. This followed additional new contract and contract renewal announcements announced earlier this year. In addition to new contracts, the company provided favorable commentary surrounding potential licensing agreements, including advanced discussions with one manufacturing partner, could add more than C$1.0M to revenue as early as 2024. Scaling revenue at new 80.0% gross margin levels, with operating expenses mostly flat, investors should begin to see significant operating leverage in the business and a clearer path to profitability. The company believes this inflection point could occur as early as this year. As the company delivers against these margin expectations, we believe new investors should gravitate towards NEXCF shares. We remain Buy rated with a $0.50 price target on NEXCF shares.
Operating results. The company reported 2023 revenue of C$5.0M, just below our C$5.3M estimate, but consistent with preliminary revenue results issued in February. Gross margin was 28.7% in 2023, down from 50.6% in 2022 as the company had increased costs associated with the move in production, including new training costs. However, moving forward we believe the offshoring of 3D modeling production to India and assistance of AI in the 3D modeling process, should drive gross margin meaningfully higher. The company has suggested gross margin in 2Q24 should reach 80.0% levels. Cash operating expenses totaled just C$17.2M in 2023, down from C$22.3M in 2022. We attribute the decline to ongoing cost discipline. OpEx should remain largely flat moving forward. The company ended the year with approximately C$0.9M of available cash.
Adjusting estimates, price target unchanged. We are reducing our revenue forecast for 2024 reflecting updated management commentary and 4Q23 operating results. We are now modeling 2024 revenue of C$9.0M, a down from C$12.0M previously. Partially offsetting lower revenue is the expectation for higher gross margin. The company has guided 1Q24 gross margin of between 50.0% and 55.0%, increasing to 80.0% in 2Q24. We believe the company is positioned to grow revenue without a meaningful increase in operating expenses, highlighting the operating leverage in the business. We are not introducing 2025 estimates currently, as revenue visibility remains somewhat challenging. Revenue visibility should improve meaningfully as the business progresses through 2024. Our $0.50 price target on NEXCF shares remains unchanged.
Valuation still attractive given meaningful revenue growth opportunity and improving path to profitability. We are valuing NEXCF shares at $0.50, reflecting approximately 8.0x EV/revenue multiple on our current 2024 revenue estimate of $9.0M. Our $0.50 price target represents approximately 450.0% upside from recent trading levels. A targeted 8.0x EV/revenue multiple represents a premium to other small capitalization technology peers operating within the augmented reality, virtual reality, and metaverse space. We view this as warranted in the near term as the business should begin to ramp quickly given recent new contract announcements and anticipated revenue generation. As the company begins to demonstrate its ability to drive meaningful revenue growth, improve gross margin expansion, and achieve consistent profitability we believe new investors should be attracted to NEXCF shares. In addition, we suspect positive news flow, including new contract and partnership announcements, to serve as a near-term catalyst, ahead of the 2024 acceleration in higher margin technology revenue.
Risks. (1) Dilution risk should the company raise additional capital given current cash burn; (2) high levels of industry competition; (3) technology risk; (4) M&A and integration risk; (5) partnership risk given partnership agreements; (6) foreign operation risk as the company operates in several jurisdictions with different levels of regulatory oversight; and (7) liquidity risk.
