With a trading volume of 2.8 billion, driving a market value growth of tens of billions, when will the valuation bubble of Marketingforce be "squeezed"?

Due to factors such as intense market competition, reduced corporate investment, and difficulty in making profits, SaaS companies have performed very poorly in the capital markets in recent years. Taking the representative SaaS target company in China, Youzan (08083), as an example, its stock price fell by 76.62%, 63.7%, and 26.53% in 2021, 2022, and 2023 respectively. After three consecutive years of decline, Youzan's stock price in 2024 plummeted by over 40%, with its market value shrinking by over 98% from its peak.

Against the backdrop of the capital market's significantly cooling attitude towards SaaS companies, a newly listed SaaS company has shocked the market with its impressive price increase.

According to the Zhitong Finance and Economics APP, Marketingforce (02556), known as a leading domestic marketing and sales SaaS company, officially listed on the Hong Kong Stock Exchange on May 16 this year at an IPO price of HKD 43.6. On the first day of listing, the stock price soared by over 18%, and since then, the company's stock price has been rising steadily, reaching a high of HKD 88 on June 12.

This means that in just 19 trading days, Marketingforce's stock price has doubled. Why can the "newcomer" Marketingforce be so "brave"? Can the company's fundamentals support its current market capitalization of nearly HKD 20 billion? By examining the company's prospectus and issuance scale, one can uncover the "tricks" behind it.

Small free float market value or significant stock price increase

Marketingforce mainly provides customers with a complete set of marketing and sales SaaS solutions and precision marketing services. In 2023, the revenue share of SaaS solutions was 57%, while the revenue share of precision marketing services was 43%.

To summarize the business highlights that support Marketingforce's continuous stock price increase, the Zhitong Finance and Economics APP believes that there are several main aspects:

Firstly, the number of users and the average contract value per user for the two major businesses have shown a clear upward trend.

From 2021 to 2023, the number of users in Marketingforce's SaaS business reached 24,127, 23,647, and 25,495 respectively (the decline in 2022 was due to the impact of the epidemic), with the average contract value per user being RMB 45,026, RMB 41,584, and RMB 51,238 respectively In terms of precision marketing services, the number of customers from 2021 to 2023 were 845, 998, and 1042 respectively, with an average advertising expenditure per customer of 5.5 million RMB, 5.9 million RMB, and 6.1 million RMB, showing a trend of "rising quantity and price".

Secondly, MARKETINGFORCE's SaaS business has a high gross profit margin.

From 2021 to 2023, the gross profit margins of MARKETINGFORCE's SaaS business were 90.1%, 89.2%, and 87.7% respectively, higher than most SaaS companies, mainly because MARKETINGFORCE has achieved large-scale commercial coverage of SaaS services for the single operational link of marketing and sales.

As of December 31, 2023, MARKETINGFORCE provides 202 functional modules through the Marketingforce platform, covering the entire marketing and sales process from content generation, distribution, data analysis, promotion to overall strategic management. These functional modules are ready-made products that do not require redundant development to increase costs, allowing customers to directly select and significantly increase the gross profit margin level.

Thirdly, revenue continues to grow, and the adjusted net loss in 2023 has significantly narrowed.

Benefiting from the increasing number of users and the average contract value per user showing an upward trend, MARKETINGFORCE's revenue has continued to grow. From 2021 to 2023, MARKETINGFORCE's revenue was 877 million RMB, 1.143 billion RMB, and 1.23 billion RMB.

Although revenue continues to grow, MARKETINGFORCE has not escaped the biggest criticism of the capital market towards SaaS companies - the difficulty in achieving profitability. MARKETINGFORCE has also not achieved profitability, with adjusted net losses of 130 million RMB and 132 million RMB in 2021 and 2022 respectively. However, the adjusted net loss in 2023 has significantly narrowed to 27.736 million RMB, which indicates to the market its expected profitability after listing from a numerical perspective.

A deeper analysis of the significant narrowing of the loss in 2023 reveals that this is mainly due to the increase in the proportion of SaaS business boosting the gross profit margin. The company's overall gross profit margin level increased from 49% in 2022 to 57.3% in 2023. At the same time, MARKETINGFORCE adopted a strategy of reducing costs and increasing efficiency, controlling the speed of expansion, slowing down the growth rate of sales and marketing expenses, reducing research and development expenses, and thus reducing the growth rate of operating expenses to release profits and reduce losses. Therefore, the reduction in losses in 2023 has some "room for improvement".

Fourthly, the launch of the AI marketing large model has to some extent boosted the company's stock price.

Shortly after going public, MARKETINGFORCE launched the TforceAI marketing large model, which, through advanced algorithms and multimodal technology, can deeply analyze market data, consumer behavior data, and social media data to provide efficient and precise marketing and sales solutions for enterprises. Its functions such as copywriting, image and video creation, personalized recommendations, market insights, and sales forecasting enable enterprises to more flexibly respond to market changes and enhance marketing effectiveness However, compared to the above four major operational highlights, the smaller market capitalization may be the most crucial factor for MARKETINGFORCE's stock price to double in the short term.

According to MARKETINGFORCE's prospectus, the company issued a total of 5.9497 million shares in this IPO. After the sale, these shares only account for approximately 2.53% of the total number of shares in the company. Among these 5.9497 million shares, 0.9041 million shares are held by cornerstone investors, so the market capitalization available for trading at the time of MARKETINGFORCE's listing is less than HKD 220 million.

With such a low market capitalization, it is very easy for the stock price to rise. Looking at the market, from the time MARKETINGFORCE went public to when its stock price doubled, the total turnover in 19 trading days was only HKD 280 million, yet the company's market value increased by billions of Hong Kong dollars during this period.

Three Potential Challenges vs. 14.43x PS Valuation

After understanding the logic behind MARKETINGFORCE's continuous rise, investors should have a deeper understanding of the potential operational challenges that MARKETINGFORCE faces, one of which is intense market competition.

According to Frost & Sullivan data, although MARKETINGFORCE has become the largest domestic marketing and sales SaaS solution provider, its market share in 2022 is only 2.6%. The leading players in the market only have a low single-digit market share, indicating that the market is extremely fragmented and fiercely competitive.

Secondly, from a long-term perspective, MARKETINGFORCE currently lacks a synergistic strategic advantage in product layout under intense market competition.

MARKETINGFORCE's current SaaS solutions mainly rely on two flagship products, namely the marketing SaaS product T Cloud and the sales SaaS product Zhenke, which target only the marketing and sales aspects of enterprise operations. However, other leading SaaS players in the market have extended their SaaS products and services to cover all aspects of enterprise operations, including marketing and sales, supply chain management, human resources, and many other dimensions.

SaaS companies that cover all aspects have a larger market space and can achieve cross-selling to existing customers, thereby forming a strategic advantage and first-mover advantage through product synergy. In the future, they may gradually squeeze the living space of single-link SaaS product companies with the strategic advantage of product synergy.

Thirdly, the profit outlook remains uncertain.

Although MARKETINGFORCE's adjusted net loss for 2023 has narrowed to RMB 27.736 million, this may have somewhat amplified the market's expectations for MARKETINGFORCE's future profitability. However, the actual situation may be more complex.

In fact, achieving profitability by reducing sales and marketing expenses and research and development expenses is not difficult, but even so, it is only a short-term strategy that sacrifices market expansion and future growth to create the illusion of short-term profitability. Companies with a long-term perspective would not operate in this manner Under intense market competition, if Marketingforce accelerates its market expansion speed, sales and marketing expenses will also increase, putting pressure on profitability. More importantly, Marketingforce has not yet expanded its SaaS products to cover other aspects of enterprise operations. This strategic disadvantage sacrifices greater potential for growth and product synergy, but it has also prevented the company from experiencing significant losses. However, if Marketingforce expands into other areas in the future, there is a possibility of increased losses due to a potential decline in the gross profit margin of SaaS products and increased operating expenses.

Of course, Marketingforce could choose not to expand into other areas and continue to focus on sales and marketing in this single track. However, in the long term, the question remains whether it can withstand the attacks from other players with product synergy strategic advantages, posing a significant potential risk.

At the same time, the risks faced by precision marketing business have cast a shadow over Marketingforce's profit expectations. Firstly, precision marketing business exhibits significant volatility and is highly correlated with the macro economy. If the industry enters a downturn, the operational difficulty of precision marketing business will increase. Secondly, the rising costs of media platform traffic may also put pressure on this business.

For example, in 2023, the number of customers and per customer spending in Marketingforce's precision marketing business continued to grow, driving an increase in gross revenue for the business. However, due to the increase in advertising fees charged by media platforms, the revenue of this business decreased by over 13% year-on-year.

Under the "pressure" of the above three major potential operational challenges, Marketingforce may face a "bubble squeeze" phase in the future, as the company's current valuation is already at a high level. According to Wind data, as of the close on June 14th, Marketingforce's PS valuation was 14.43 times. During the hype of the SaaS concept in the past few years, the PS valuation of high-quality SaaS targets was driven very high. However, after nearly two years of "bubble squeezing," SaaS company valuations have dropped significantly. For example, China's Youzan currently has a PS value of only 1.7 times, and the PS valuations of core SaaS companies in the Hong Kong market are around 6 times, while the average PS valuation of the leading US SaaS company Salesforce (CRM.US) this year is only 7.13 times. In comparison, there is a high possibility that Marketingforce's value is overestimated.

In summary, Marketingforce has its operational highlights, but perhaps its relatively small market capitalization is the main reason for its short-term doubling after listing. The company faces multiple potential challenges such as intense market competition, lack of product synergy strategic advantage, uncertain profit prospects, and the potential risk of an already high valuation Due to the current market capitalization of MARKETINGFORCE, which has surged, still being less than HKD 500 million, it remains within a relatively small range. There is a possibility that its stock price may continue to rise in preparation for the lifting of restrictions. However, once it enters the "bubble squeezing" stage, the depth of the stock price correction may exceed market expectations