(Image: Zen Buddha Silence, by Marilyn Barbone)
January 2, 2022
Research Solutions has a program called Article Galaxy which gives researchers in the scientific, technical, and medical field unlimited access to articles for the price of $10,649 a year. It’s an outstanding value for many researchers, who otherwise have to pay $4,000 to $6,000 for each article. Article Galaxy users are growing rapidly at 30% to 40% a year.
Research Solutions aims to be “The Bloomberg for Scientific, Technical, and Medical Research.” RSSS has a strong competitive position because it offers such a great value proposition to those who sign up for Article Galaxy. Article Galaxy also integrates with other software and automatically gathers new content of interest.
The company provides excellent customer service. They listen carefully to their customers—both criticism and applause—and often they implement requested features.
A great value proposition plus excellent customer service means there is low churn plus an ability to upsell often.
In brief, Research Solutions has a strong competitive position that should allow it to continue growing rapidly and to earn a high ROIC (return on invested capital) for decades.
Because customers pay upfront, while the company pays its expenses throughout the year, Research Solutions has a negative cash conversion cycle. Free cash flow grows as new customers sign up, while capital does not need to be kept or raised in order to fund growth. (As far as fixed assets, it’s just a leased office space plus computers.)
Article Galaxy generates gross margins over 80%. Gross profit from new sales translates almost entirely to free cash flow because the marginal cost of new users is much less than their lifetime value.
Management believes the total addressable market (TAM) for Article Galaxy is 700,000 users. Management ultimately aims to capture 4% of the TAM, which is 28,000 users.
RSSS currently has 590 users of Article Galaxy. Assume that the number of users grows 35% a year for the next six years. Then there would be over 3,500 users in six years (still only 0.5% of the TAM).
Assume the price for Article Galaxy in six years is $12,500 (representing CAGR—compound annual growth rate—of 3.3%). Assume gross margins stay at 80%+ and gross profits from legacy transactions are $6 million. The tax rate is 28%.
Then we get the following figures in six years: Revenue will be $43.75 million, EBITDA will be $25.25 million, net income will be $18.18 million, and operating cash flow will be $25.25 million.
The current market cap is $65.78 million, while enterprise value (EV) is $55.63 million.
This gives us the following multiples in six years:
- EV/EBITDA = 2.20
- P/E = 3.62
- P/B = 3.29
- P/CF = 2.61
- P/S = 1.50
The current Piotroski F_Score is 7, which is good.
The founder of Research Solutions and executive chairman of the board is Peter Derycz. Derycz owns 15.1% of the stock. Management, directors, and employees own 7.9%. So total insider ownership is 23%, which is excellent.
Cash is $10.9 million, while debt is zero. TL/TA is 67.7%, which is fine because there is high cash and no debt.
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- Low case: Although users of Article Galaxy have been growing at 30% to 40% a year, growth may slow to 10% a year. In this case, the stock would be worth $1.33, which is 46% lower than today’s $2.46. (There also could be a bear market during which most stocks decline 40% to 50%. But in this case, stocks would bounce back eventually.)
- Mid case: Users of Article Galaxy will probably grow at 35% a year for the next six years. That would put the number of users of Article Galaxy at 3,500+. (That is still only 0.5% of the TAM of 700,000.) In this scenario, for a very high-quality growing business, I assume the P/E should be at least 22. That puts the intrinsic value of the stock at $12.49 six years from now. That is over 400% higher than today’s $2.46. The CAGR—compound annual growth rate—of the stock over six years would be 31.1%.
- High case: Assume that users of Article Galaxy grow at 30% a year for the next ten years. That would put the number of users of Article Galaxy at close to 8,000, but let’s say 7,000, which is still only 1% of the TAM of 700,000. In this scenario, the intrinsic value of the stock would be $27.21 ten years from now. That is over 1,000% higher than today’s $2.46. In other words, a 10-bagger. The CAGR of the stock over ten years would be 27.2%.
- Very high case: Assume that the users of Article Galaxy grow at close to 30% a year for the next fifteen years. That would put the total number of users of Article Galaxy at 28,000+. This is 4% of the TAM of 700,000, which Research Solutions has as a target in its most recent investor presentation (November, 2021). In this scenario, the intrinsic value of the stock would be $130.60 fifteen years from now. That is over 5,200% higher than today’s $2.46. In other words, a 50-bagger. The CAGR of the stock over fifteen years would be 30.3%.
One risk is sites that offer free access to scientific articles illegally. But this hasn’t been a problem so far for Research Solutions. Many outstanding organizations are already clients of Research Solutions and customer feedback is quite positive. (When the feedback is negative, RSSS listens carefully and tries to improve accordingly.) People in the scientific, technical, and medical community are less piracy-prone than most.
Another risk would be open-source journals that make content freely available. This hasn’t been a problem yet for Research Solutions. But it’s important to keep an eye on this.
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