Why These Analysts Are Bullish On Opower After Meeting With Management: Large, Long Contracts Are The Key

Pacific Crest analysts Monika Garg, Brendan Barnicle and Jason Celino recently met with Opower Inc OPWR’s CFO, Thomas Kramer,and IR director, Charlie Mayer, last week. In a report issued Sunday, they assure that the meetings affirmed their confidence on the company’s growth potential, which they expect to accelerate from 15 percent this year to 20 percent next year.

In fact, management sounded confident about the company being able to grow at 20 percent over the next three-to-five years. However, revenue growth could stand somewhere between 17 percent and 23 percent, depending mainly on the timing of the renewals of large size contracts.

The firm is a buyer of the stock, and has issued an Overweight rating and $20.00 price target for it, based mainly on the increasing number of “larger and longer contract deals” being signed (which shows confidence in the company’s technology) and the stock’s attractive valuation at 1.8 times the estimated revenue for 2016.

A More Detailed Look

The report goes on to take a more detailed look at the two elements behind the firm’s recommendation.

Regarding large and long-term contracts, they note that “Opower has signed two big deals in the last two quarters.” In the June quarter, it inked a $50 million deal spanning over six years. In addition, the company signed its largest contract ever in the March quarter: a $90 million – seven years deal with PG&E Corporation PCG.

The analysts explain that, “Opower is pushing for longer-term contracts, which provide better visibility. Last quarter, Opower also signed a new international customer for its digital engagement product. This was a $5 million deal and the contract spans five years. More than half of last year’s quota carrying reps (QCRs) were hired in 2H14 and are still not ramped. The company expects productivity of these QCRs to improve over the next 6 to 12 months, which should help Opower’s growth.”

Finally, the note looks into valuation. Given the limited market competition, tremendous visibility, and low multiple in relation to 2016 sales estimates, the analysts see plenty of room for growth. In fact, their target price implies an upside of more than 100 percent from current stock prices.