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TechTarget Upside Is Limited after Amazing Gains
Stock Analysis & Ideas

TechTarget Upside Is Limited after Amazing Gains

TechTarget, Inc (TTGT) provides technology vendors with data solutions to facilitate sales of technology products and services. This “data-driven marketing” company went public in May of 2007.

I am neutral on TTGT stock. (See Analysts’ Top Stocks on TipRanks)

What Is TechTarget?

Data-driven marketing allows vendor sales staff a sneak peek at the people they are contacting on a sales call or email. The targeted content provided by TechTarget seeks to alert the salesperson of the contact’s intent and needs ahead of the call. In this way, the salesperson can be much more effective than during a blind cold call. 

TechTarget’s platform, for instance, can determine whether the person searching using Google (GOOG) is looking to buy, what product they are in the market for, and provide specific keywords. 

Perhaps they are in the market for Enterprise Resource Management software. When the salesperson, using TechTarget provided data, contacts this company, they can reference products and keywords that are precisely what this contact has been looking for. 

This takes cold calling to the next level and increases effectiveness significantly. It also gives the vendor sales staff a massive advantage over their competitors. In addition, the technology does not rely on third-party cookies. It utilizes first-party data through an opt-in model.

Despite being public since 2007, TechTarget stock was a market underperformer until 2018. In fact, from the IPO through January 1, 2018, the company stock was down over 5%. An investment in an S&P 500 index gained significantly more than 100% over this period. 

Since January 1, 2018, TechTarget stock has gained more than 628%. The main reason for this seems clear. After years of flat revenues, the company has seen significant growth since 2018.

Competitive Landscape Drives Growth and Profits

As mentioned previously, TechTarget does not rely on third-party cookies. With their elimination on deck, the TechTarget product has become more in demand than ever. This has driven top-line growth and added to an already profitable bottom line. In Q3 2019, TechTarget generated $33.8M in revenue. In Q3 2021, the company generated $69.8M, a 106% increase just two years later. 

TechTarget operates on a subscription model. The subscription customer base is swiftly rising, having gone from 1,399 in 2019 to 1,585 at the end of 2020. Of these customers, 25 spent at least $1M per year with TechTarget. This indicates that TechTarget relies upon a few customers for much of its revenue. This is a risk factor to future results.

TechTarget has generated over $22M in operating profits for the first nine months of 2021. This is an increase over 2020 and 2019. The company is also generating positive cash flow from operations. However, it has a material balance, nearly $200M, of long-term debt on the balance sheet to service.

The company trades at a forward price-to-earnings ratio of 48 and a forward price-to-sales ratio over 10. These multiples, and the more than 600% recent run in the stock’s price, may indicate that the most significant gains for investors have already been made in TechTarget for the time being.

The company has a bright future; however, it would be wise for investors to allow the fundamentals to catch up to the valuation before jumping into this stock.

Wall Street’s Take

Turning to Wall Street, TechTarget has a strong buy consensus rating. Six analysts have Buy ratings, joining just one hold and no sell ratings. Analysts are consistent in their price targets with the low target at $105 and the high coming in at $115.

The average TechTarget price target of $110.86 implies just 3.6% upside potential from the current price.

TechTarget Summary

TechTarget stock was a blip on the radar for many years before exploding onto the scene over the last few years. It has made impressive returns for shareholders during that time. Revenue, operating profits, and cash flows are up significantly over this time.

Unfortunately, so is the stock’s valuation relative to the underlying fundamentals. As a result, TechTarget currently warrants a hold rating because it has a PS ratio over 10 on a forward basis and analyst targets indicating limited further upside.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.

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