Goldman Sachs analyst Adam Hotchkiss recently downgraded E2open Parent Holdings (NYSE: ETWO) from Neutral to Sell, reducing the price target from $3.50 to $2.90. This action followed a period of underperformance for the stock and reflects concerns about the company’s organic growth prospects, execution risks, and substantial debt burden. E2open’s stock price subsequently declined.
Table Content:
Organic Growth Challenges and High Leverage Raise Concerns
Hotchkiss highlighted the lack of clear visibility into a turnaround in organic growth for E2open. The company’s historical reliance on acquisitions to fuel growth has resulted in a significant debt load, particularly problematic in the current high-interest rate environment. This leverage restricts E2open’s ability to reduce debt, hindering its progress toward achieving leverage targets and limiting investments in future growth initiatives, including potential acquisitions.
Over the past four years, E2open has roughly doubled in size through acquisitions. Consequently, the amount of new annual recurring revenue (ARR) required to significantly accelerate growth has also doubled. This places a greater emphasis on cross-selling existing products, especially as new customer acquisition has slowed. This challenge is further compounded by the need for continued development of E2open’s organic sales structure. Hotchkiss expressed concerns about the company’s ability to achieve growth beyond the low single digits in the near to medium term without further acquisitions.
Valuation and Peer Comparison
While E2open’s current valuation appears undemanding, Hotchkiss believes a higher valuation is unlikely without a substantial improvement in fundamentals. He drew comparisons to other growth software companies facing challenges, such as Dropbox Inc. (NASDAQ: DBX), RingCentral Inc. (NYSE: RNG), and SolarWinds Corp. (NYSE: SWI), which have experienced significant declines in their valuations.
Although E2open’s management has expressed intentions to prioritize debt reduction and organic growth, Hotchkiss maintains a cautious stance until tangible progress towards these goals is evident, especially considering the company’s slowing organic growth compared to its peers.
Declining Growth and Lowered Guidance Add to Concerns
Four consecutive quarters of declining subscription revenue growth, coupled with lowered fiscal 2025 guidance, further reinforce the cautious outlook for E2open. The rapid accumulation of assets and teams through acquisitions has significantly increased the required level of new ARR for organic growth to match historical levels. Achieving this level of new ARR will likely remain a challenge, particularly given the current economic climate where larger transformation projects are being deferred, impacting new customer acquisition.
Financial Projections and Stock Performance
Hotchkiss projects E2open’s third-quarter revenue to be $151.7 million with adjusted earnings per share (EPS) of $0.04. As of Wednesday, ETWO stock was trading at $3.02, reflecting a 3.51% decline.
Conclusion: A Cautious Outlook for E2open
E2open faces significant headwinds in the form of sluggish organic growth, a heavy debt burden, and a challenging economic environment. While the company’s valuation may seem attractive, a substantial improvement in fundamental performance is necessary to warrant a more positive outlook. Until clear evidence of progress emerges, investors should remain cautious about E2open’s prospects.
