Email's Not Dead: Canaccord Buys SendGrid For 'Obvious' Cash Flow Potential

SendGrid Inc SEND is up 58 percent since its December initial public offering, but one analyst still sees room to run.

The Rating

Canaccord Genuity analysts Richard Davis and David Hynes Jr. initiated coverage of SendGrid with a Buy rating and a $32 price target.

The Thesis

By Canaccord’s assessment, SendGrid boasts compelling total addressable markets with obvious opportunity to achieve significant free cash flow margins.

From the start, its fundamentals appear stronger than those of Constant Contact and convey a “promising business in a segment that has not been ruined by over-investment by over-zealous VCs,” Davis and Hynes wrote in a note.

The vertical software-as-a-service company is also seen to operate with a low customer acquisition cost and high lifetime value. Such circumstances could support 30 percent operating margins with scale, Canaccord wrote.

At the same time, the firm maintains a “cost-efficient” go-to-market strategy with sales and marketing consuming less than 25 percent of revenue. The rate is similar to those of category leaders Atlassian Corporation PLC TEAM, Dropbox Inc. DBX and Twilio Inc TWLO.

“SendGrid fits into several of the favorable investment themes that we have outlined in software: low-friction selling/adoption, a business-to-developer GTM model, and the notion of an infrastructure layer cake, in which buyers source the various components of their stack from best-of-breed vendors,” the analysts wrote. “In our view, this bodes well for both the business and the stock.”

Price Action

At time of publication, shares were trading down about 2.7 percent off the open around $27.89.

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