Lake Streets Starts Xactly At Buy, Says Stock Could Worth More Than $20 If Salesforce Buys Company

Lake Street Capital Markets has started Xactly Corp XTLY with a Buy rating and $12 price target, saying that last year's sales investments would bear fruit this year. Moreover, the brokerage said the stock could be worth more than $20 if salesforce.com, inc. CRM buys the company.

San Jose, California-based Xactly provides cloud-based incentive compensation management (ICM) and sales performance management software. Gartner estimates the sales performance management market at over $715 million, and that it will grow to $1.54 billion by 2019, a 20 percent CAGR, while Xactly estimates it is addressing a market in excess of $7 billion.

Under-Appreciated Name

Analyst Eric Martinuzzi noted that investors may have under-appreciated Xactly's "large and growing total available market, billings growth topping 30 percent for three straight quarters, an outlook for positive CFFO by Q4'FY17, and a SAAS-based business model with high renewal rates."

In addition, the analyst expects upside to consensus estimate from its relationship with salesforce.com and competitive product positioning.

Related Link: Xactly Unveils Customer-Driven Sales Performance Management Innovations

The company's full quota bearing sales rep (FQBR) headcount grew 55 percent in FY16, and Martinuzzi estimates the current FQBR headcount to be at 47, which is up from last year's ~30.

"Given sales hires only get productive at the three-to-six-month mark and enterprise-level reps at the nine month mark, Xactly may be about to experience a billings acceleration in FY17 the same way it experienced a sales hiring acceleration in FY16," Martinuzzi wrote in a note.

The analyst also hailed the company's improving billing retention, as FY16 annual revenue retention improved to 105 percent from 104 percent in 2015 and 102 percent in 2014.

Noting that the accelerated hiring and likely improved productivity would boost operating margin, Martinuzzi is "confident that Xactly will meet or exceed its Q4 goal of achieving positive cash flow from operation."

M&A Activity On The Horizon?

Meanwhile, the analyst said "no one would be surprised" if salesforce.com bought Xactly, as SFDC (Salesforce Developer Community) "pays its 10,000 reps using Xactly and SFDC is an Xactly reseller, Xactly would make a natural target for the SFDC Corp Dev team."

Martinuzzi recalled that SteelBrick (also a Xactly partner) was acquired for $300 million by SFDC in February 2016 for an EV/forward sales multiple over 10x.

"On a 5x takeout multiple, Xactly shares would go for over $20 per share," Martinuzzi highlighted.

"At an EV/CY17 sales of 1.8x, we believe the shares are well positioned to outperform," he added.

According to TipRanks, Martinuzzi has a success rate of 53 percent with an average return per recommendation of +7.5 percent. The analyst is ranked 925 out of 3,910 analysts.

At the time of writing, shares of Xactly rose 5.03 percent to $8.14.