Clarivate (NYSE:CLVT) is an analytics and research business whose services are used widely by academic and government institutions, innovative healthcare businesses, legal practices and other large corporate clients.
Despite having a fairly strong position within its market, shares of Clarivate are down nearly 35% over the past 12-months, so is Clarivate stock undervalued, or has the market downgraded the stock to reflect real risks within the business?
Where Are CLVT Shares Trading Now?
Given that Clarivate’s earnings have been negative over the past year, the stock’s most useful valuation metrics are its price multiples to sales, book value and operating cash flow. These multiples come in at 1.2, 0.6 and 9.3, respectively.
Although Clarivate isn’t priced at outrageous multiples to any of these metrics, its lack of sustainable profitability and the fact that the stock has sold off so drastically could open the door to CLVT being a trapdoor for value investors.
Analysts remain divided on Clarivate’s trajectory. At the moment, the stock has three buy ratings, five hold ratings and no sell ratings.
Slow Revenue Growth and Ongoing Net Losses
One of the largest problems for Clarivate at the moment is the fact that its revenues have been declining for the last six quarters. In part, this can be attributed to the large presence of academia and government contracts in its recurring revenue mix.
Ongoing cuts to educational and government spending have hampered Clarivate’s growth. While management noted in its Q2 supplemental materials that these cuts are now having less of an impact, the risk remains for further cuts as pressure to reduce federal spending mounts.
Another issue with Clarivate is the fact that the business has only had one quarter of positive net income since it went public in 2019. While Clarivate’s losses have been gradually narrowing in the last few quarters, it has still lost about $434 million over the last 12 months.
Adjusted earnings have fared considerably better, with adjusted net income of $219.1 million reported in H1. Even so, the lack of GAAP profitability and Clarivate’s slow progress on that front could be concerning for investors.
Both of these trends largely held steady in Q2. Organic revenue was up, though only by 0.5 percent. The net loss came in at $72.0 million, a significant improvement from the $304.3 million the business lost in the year-ago period.
Though Clarivate’s fundamentals appear to be slowly moving in the right direction, the fact that CLVT shares remain deeply sold off compared to where they were a year ago is a decent indication of the market’s reaction to its Q2 performance.
A final negative that investors may want to be aware of is Clarivate’s high debt load, which stood at over $4.5 billion at the end of Q2. Considering that the entire business currently has a market cap of just $2.9 billion and its cash reserves total just $362.6 million, this could prove to be a burdensome level of debt for Clarivate to manage if economic conditions or other factors weigh down its revenues further.
The Bull Case for Clarivate
On the plus side, Clarivate has managed to create a decent financial base for itself by focusing its efforts on recurring subscription revenues.
As of Q2, 88 percent of Clarivate’s revenues were from recurring revenue sources, up from 80 percent a year earlier. This somewhat helps to take the edge off of its slow revenue growth by providing it with a highly predictable revenue mix.
This advantage is added to by its high renewal rate, which stood at 96 percent among its academia and government customers in the first half of this year. The large number of these highly stable institutions that Clarivate has as customers also gives it something of a competitive moat, though perhaps not an unassailable one.
Interestingly, Clarivate is also engaged in a fairly aggressive share buyback program, especially for a business that still isn’t delivering net profitability. In Q2, for instance, Clarivate used the free cash flow it generated to buy back 11.5 million of its shares.
For the first half of the year, the business bought back over 23 million shares at a price of over $100 million. With management seemingly committed to keeping the pace of buybacks high, it’s likely that investors who hold Clarivate will see ongoing share concentration.
A final consideration where Clarivate’s bull case is concerned is its potential to deliver additional value to both its customers and shareholders as it rolls out new AI tools.
Several such tools are expected to be introduced in the second half of this year, including a new AI agent for its Web of Science product and an AI patent watch tool. Enhancing its existing products with AI could help Clarivate improve its revenue growth. According to management, some 4,800 institutions are already adopting Clarivate’s growing suite of AI tools.
Is Clarivate Stock Undervalued?
Clarivate appears undervalued based on the range of analysts price targets from a low of $3.75 to a high of $7.00. The average price target of $5.14 would result in a gain of over 18 percent, but it seems at least feasible that the stock could have room to move significantly lower.
Clarivate is an interesting case in the sense that its lack of GAAP profitability and slow revenue growth are, to a large extent, balanced off by annuity-like recurring revenues, strong free cash flows and a surprisingly rapid share repurchase program. These characteristics could make CLVT significantly more appealing from a value perspective than its top and bottom line growth metrics might suggest at first glance.
It remains something of a risk, given that its value is still somewhat dependent on a return to higher growth rates. This growth could fail to materialize, especially if the academia and government segment of its business sees renewed pressure from budget cuts. Furthermore, the fact that Clarivate’s debt load is so high could make the business financially risky in the long run.
Although there could be a bit of a value argument in Clarivate’s favor, the stock may still be a better one to hold than to buy at today’s prices. Clarivate could become an attractive business if and when it can show shareholders evidence of a return to revenue growth and progress toward net profitability. Until then, though, the risks in CLVT may outweigh the stock’s appeal.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.