When I officially recommended that A Rich Life subscribers buy Dropsuite (ASX: DSE) shares at a pre-consolidation price of $0.23 ($2.30 post-consolidation) in April 2023, the investment thesis centered on its potential for organic revenue growth, its cashflow-positive inflection point, and its ability to scale through managed service provider (MSP) partnerships.
At the time, Dropsuite was positioned as an emerging growth story with strong tailwinds in cybersecurity demand and a focus on profitable growth.
Fast forward to January 2025, and the company has entered into a Scheme Implementation Deed with NinjaOne, according to which shareholders receive $5.90 per share. In response, the Dropsuite share price has surged almost 30% to $5.69 at the time of writing.
Zooming out, I note that the annualised recurring revenue is up over 75% from April 2023, but the share price is up more than 145%. Thus, you cannot escape the conclusion that the market is more optimistic about the stock now, than it was before.
The company has grown strongly under the leadership of current CEO Charif Elansari, who, it must be noted, is part of the board that unanimously supports this takeover occurring “in the absence of a Superior Proposal and subject to an Independent Expert concluding (and continuing to conclude) that the Scheme is in the best interest of Dropsuite shareholders.”
In a separate quarterly results announcement today, Dropsuite disclosed one of its best-ever quarters, when it comes to growth in annualised recurring revenue, with the figure jumping from $42.6 million to $49.8 million over just three months.
A Dropsuite share price of $5.70 per share represents a Dropsuite full diluted market capitalisation of about $410 million. The current price is, therefore, putting the company on about 8.2 times annualised recurring revenue.
When I covered the last set of quarterly results, I said:
“Given the share price rise of late, Dropsuite shares are clearly less appealing than they were when I released the initial buy recommendation. But given the strong ARR growth and consistent gross margins, I hesitate to downgrade the stock to Hold too early, especially while I maintain my trust in management.”
At that time, the stock was trading on about 6.7x ARR. However, with the strong share price gain today, the stock is now trading at a somewhat more optimistic 8.2x ARR.
On top of that, the current value is clearly reflecting the probability that shareholders receive $5.90 per share in about 4 months. According to the scheme of arrangement:
“Subject to shareholder approval being obtained and other conditions of the Scheme being satisfied or waived in accordance with the SID, the Scheme is expected to be implemented in late May 2025.”
In that case today’s buyers would receive 3.5% profit over 4 months, which could be attractive if you’re fairly certain the transaction will occur.
Estimating the percentage chance of this transaction occurring is a whole different ballgame to my original thesis for the stock, and so out of respect for the fact that the thesis has changed, I am now officially downgrading the stock to Hold.
The company will be holding a webinar tomorrow, and I will publish my thoughts on the financial results in a separate article after that.
Disclosure: the author owns shares in DSE and will not trade DSE shares for 2 days following this article. This article is not intended to form the basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).