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Model N offers solutions designed to work with applications composed of ERP (Enterprise Resource Planning), which is software that manages all the processes of a company: HR management, accounting, sales, distribution… and CRM (Customer Relationship Management). Model N manages annually $500 billions while customers get 99.95% availability on its integrated cloud solutions. 
 
The company has a large portfolio of customers in different industries, allowing it to diversify its revenue sources and diminish the risks associated with economic downturns by reducing its dependency on a single industry. At the same time, the company can access data that can be leveraged to improve their products and services.

Model N - Partners

Strong competition:
 
Tech companies based on the cloud have been among the best performing ones since 2010 (+535% in 10 years). The enterprise resource planning (ERP) market is highly competitive, with many businesses vying for a share of the market. One reason for this high level of competition is the significant growth in the market over the past few years. According to recent data, the global ERP software market is projected to reach $78.4 billion by 2026, growing at a compound annual growth rate (CAGR) of 7.6% during the forecast period. This growth has attracted many new players to the market, including smaller startups and established companies expanding their offerings. Additionally, the high demand for ERP solutions, the need for customization, technological advancements, industry-specific solutions, and integration with other software systems have all contributed to the competitive nature of the market. To remain competitive, companies must continually innovate, offer high-quality solutions, and provide excellent customer service. 
 
Model N is therefore not alone in this market and must face two behemoths (and the rest), very well established in this sector: Oracle and Microsoft. 
Oracle (world leader in databases) offers a range of ERP solutions capable of managing large amounts of data and complex business processes, including its flagship product Oracle E-Business Suite. Microsoft has Dynamics 365 as its EPR solution which is a cloud-based system that helps businesses with financial and operations management.
 
To differentiate itself from these competitors, Model N could improve by expanding its industry-specific solutions to cover more industries and broaden its customer base. Additionally, enhancing its analytics capabilities could provide businesses with even deeper insights into revenue streams, giving them a competitive edge. Model N could also invest in improving its user interface and user experience to make its solutions even more user-friendly than those of Microsoft and Oracle. Furthermore, its cloud-based solutions could be further developed to provide even greater scalability and flexibility, allowing businesses to easily integrate with its solutions and scale up or down as needed.
Model N - Products

Valuation: 
 
The company saw its market capitalization increase by nearly 450% over the 2013-2023 period, from $227 million to more than $1.246 billion, representing a CAGR of 18.56%. Its revenues double ($102 million to $219 million) over the same period. EBITDA and EBIT have respectively a CAGR of 22.79% and 28.9% over the last 5 years for operating margins of nearly 15%. Analysts expect EBITDA to increase by 76% to $56.5 million by 2025 and margins to be around 20%. The ROA (Return on Asset) has been multiplied by eight (+812%) between 2018 and 2022 from 0.77% to 7.03% and the ROE (Return on Equity) has been multiplied by 5 (+541%) over the same period, from 3.21% to 20.6% (and reach 30% in 2023)
 
Despite a 970% increase in FCF (Free Cash Flow) since 2018 and an excellent FCF Conversion Rate at 94.8% (forecasted for 2023) the company has a negative P/E, indicating that it is investing heavily in growth initiatives such as R&D, marketing and acquisitions such as in 2020 when Model N buys Deloitte's Life Sciences Pricing and Contracting Solutions Business.
The group also enjoys a very good management as evidenced by the Net Cash Position, $3 million in 2018 and $57.5 million in 2022) for a controlled leverage (Debt/EBITDA) around -1.80x in 2022.

Model N - Revenues


 All in all, Model N is a well-managed company with strong growth potential in the coming years, despite a market dominated by Microsoft and Oracle (in the US). There are still many opportunities for consolidation and growth in this highly fragmented market that could benefit from this. However, it will be interesting to see where the group goes from here, especially if it makes a strategic pivot like its competitors. This is one to keep on your radar, especially if the stock falls further, which could thus constitute an interesting entry point.
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