Adcore (ADCO): Building a “Software with a Service” Growth Engine
Investment Thesis Overview
Adcore Inc. (TSX/ADCO) is a digital advertising and marketing technology company that combines agency services with proprietary software solutions. Despite recent negative net income stemming from software investments and marketing expenditures, Adcore aims to reach a 10% net profit margin, buoyed by:
60% insider ownership: Aligned interests with shareholders.
New product momentum: MediaBlast hit $2 million ARR within its first year; most recent product launch of Proposaly.io presents cross‐selling opportunities.
Potential to morph into a “Software with a Service” model: Using software to scale agency operations more efficiently—and, in turn, using agency relationships to drive software adoption.
Given these catalysts for top line growth and improving net profit margins I think the stock is heavily undervalued.
Business Model & Recent Developments
From Agency to “Software with a Service”
Historically, Adcore has operated as a marketing agency with a robust tech backbone, offering AI‐based ad management and analytics. Its evolution seeks to blend the high‐touch element of an agency with a scalable software platform. The rationale:
Use the software to improve efficiency and client retention in the agency business.
Leverage agency relationships to deploy the software at clients’ sites, potentially reducing reliance on hands‐on consulting.
New Product Launches & Acquisitions
MediaBlast: Quickly reached $2 million ARR in its first year, indicating strong initial market traction.
Proposaly.io: A proposal management tool that could streamline campaign pitches and upsell cross‐services.
Acquisition Strategy: Management has expressed interest in acquiring software companies with proven product‐market fit (PMF). The idea: fold these into Adcore’s distribution channel—i.e., the agency side—avoiding the cost and risk of purely “greenfield” software development.
The positive case for Adcore is entirely predicated on its ability to successfully marry its service to its software offering. Specifically, to successfully leverage its agency activities as distribution channel, increase margins, retention and true recurring revenue.
There is some risk that the 2 million ARR from its MediaBlast was essentially just a pie of the agency budget that got billed to the software.
Insider Ownership & CEO Goal
With 60% insider ownership, management has skin in the game. Their stated target of a 10% net profit margin signals confidence that high operating expenses (mainly R&D for new software) can normalize over time.
Hiring Activity
Hiring activity has ramped up considerably this quarter with 7 new position in sales, customer success and project work signalling at least higher anticipated deal flow.
Financial Snapshot & Valuation
All figures are based on the current stock price of $0.19 per share. Recent figures show gross margin gains from around 40% to 47%. The challenge: these R&D and operating expenditures have pushed net profitability into the red, leading to a negative P/E ratio. However, a few highlights:
Gross Profit: Up 12% year-over-year.
Revenue Growth: Particularly strong in North America (27% growth) and APAC (26%), offset by EMEA declines. Current EV/Revenue ratio is only around 0.36.
Valuation Multiples:
P/B ratio ≈ 1.8, suggesting the market sees some intrinsic value in the balance sheet and intangible assets.
Negative P/E at present, reflecting net losses.
If Adcore can get to sustained 10% net margins while continuing to grow, the current valuation ($13M market cap, $9M enterprise value, as of writing) may look undemanding. The “pessimistic,” “baseline,” and “optimistic” valuation scenarios (as discussed below) all suggest a higher fair value if management delivers on profitability.
Growth Drivers: Adcore’s Software Play
A caveat, the software market that Adcore operates in is extremely crowded,
a direct competitor in the Google Ads management space Marin Software has reported shrinking revenue for several years now. The ongoing march of AI into ever more software niches add an additional element of uncertainty, bidding, reporting and budgeting for Google Ads is likely to become much more automated. Can Adcore stay on top of this trend?
There are, however, positive indicators that their software play will pay off:
MediaBlast: Already at $2M ARR in its first year, a clear sign that clients value self‐serve ad management tools. If retention remains high, MediaBlast alone could start contributing a meaningful portion of Adcore’s revenue mix.
Proposaly.io: A newly launched proposal management solution. Beyond generating subscription income, Proposaly can serve as a cross‐selling gateway, bringing existing agency clients into a deeper software relationship.
Software “Stickiness”: The core challenge is ensuring that Adcore’s tools become embedded in clients’ everyday workflows. By training client teams and demonstrating the software’s standalone value—beyond Adcore’s consulting staff—there’s an opportunity to convert short‐term projects into ongoing SaaS licenses.
Three Simple DCF Scenarios
I know, I know discounting cashflow is very passé and for good reason. Yet, I find that it gives us a good baseline to explore different scenarios and get directional information on a whether a company is undervalued or not. Of course if
So here we go.
1. Pessimistic Scenario: Zero Revenue Growth, Gradual Margin Ramp
Revenue stays flat at $24M each year (0% growth).
Net Margin evolves from 0% in Year 1 to 9% in Year 5 as software investments taper and efficiency improves.
Terminal Growth: 2%.
Year-by-Year Net Income (M)
Year 1: $0.00 (0% margin)
Year 2: $0.72 (3% margin)
Year 3: $1.20 (5% margin)
Year 4: $1.68 (7% margin)
Year 5: $2.16 (9% margin)
Terminal Value (end of Year 5):
Discounting all net incomes + terminal value at 10% yields an Enterprise Value of ~$21M. After adding $4M net cash:
Outcome: Even with no revenue growth, simply achieving ~9% margins in 5 years implies a fair value ~$25M (vs. $13M current market cap).
2. Baseline Scenario: Moderate Growth, 5%–10% Margin Ramp
Revenue Growth: ~5% annually, starting from $24M.
Net Margin: Improves from 5% in Year 1 to 10% by Year 5 (management’s stated target).
Terminal Growth: 3%.
Year-by-Year Net Income (M) (approx.)
Year 1: $1.20
Year 2: $1.76
Year 3: $2.12
Year 4: $2.50
Year 5: $2.92
Terminal Value (end of Year 5):
Discounting to present (10% rate) suggests an Enterprise Value of ~$34M. After adding $4M net cash:
Outcome: If Adcore hits ~10% net margins on moderate revenue growth, the fair value could be ~$38M.
3. Optimistic Scenario: High Growth, Strong Margin Upside
Revenue Growth: ~8% annually.
Net Margin: Starts at ~7% in Year 1, ramps to 12% by Year 5 (assuming software investments pay off strongly).
Terminal Growth: 3%.
Year-by-Year Net Income (M) (approx.)
Year 1: $1.68
Year 2: $2.33
Year 3: $2.80
Year 4: $3.33
Year 5: $3.92
Terminal Value (end of Year 5):
Discounted cash flows yield an Enterprise Value of ~$46M. Adding $4M net cash:
Outcome: If Adcore sees both robust revenue growth and margin improvement, a fair value ~$50M is within reach.
Key Takeaways: Margin of Safety & Potential Upside
Pessimistic Case (~$25M): Shows that even zero revenue growth coupled with gradual margin expansion might justify a valuation nearly 2× the current market cap of $13M.
Baseline Case (~$38M): Suggests the stock could be substantially undervalued if management’s target of a 10% net margin is achievable with moderate 5% growth.
Optimistic Case (~$50M): Demonstrates the upper range of a plausible scenario if Adcore successfully transitions into a high-margin “Software with a Service” model, leveraging new products like MediaBlast and Proposaly.io.
Risks & Considerations
Agency Business Volatility
Agencies can be project‐based and lumpy, with potential for key client churn. Losing a major client can pressure revenue and margins. Since the lion share of expenses is pay roll they also tend to scale linearly with revenue and even if revenue goes down you are stuck with those costs for a while.
Software Adoption Risks
I know from experience, that in many “agency + software” models, the software often ends up being used only by the consultant. Once the project ends, the license goes dormant. Adcore must prove the software’s utility to end clients and adequately train them so it stands on its own.
Acquisition Execution
Naturally, we as investors are nervous if a company announces they are looking for acquisition targets. Companies more often overpay for an acquisition than it turns out to be accretive. While buying smaller, product‐market–fit startups could accelerate Adcore’s software offerings, integration and synergy are not guaranteed. Overpaying or failing to integrate effectively are real risks.
Geopolitical & Regional Challenges
Adcore’s revenue from EMEA has been hampered by broader challenges in that region, showing that external factors can derail growth in key geographies.
Conclusion: Why Adcore
Strong Gross Margins: An agency gross margin of ~40–47% is healthy, especially if the company transitions further toward a SaaS‐like model.
Insider Alignment: With 60% insider ownership, the CEO and leadership team are highly motivated to see the company’s valuation reflect true earnings potential.
Path to Profitability: Reaching 10% net margins is ambitious but plausible if R&D and marketing spend normalize while revenue grows.
Recurring Software Revenues: The success of MediaBlast (already $2M ARR) hints that well-targeted software tools can produce a reliable revenue stream—and Proposaly.io might follow.
Valuation vs. Potential: With a modest market cap and negative net earnings (thus no P/E), the market is discounting profitability risk. If the strategy to bundle software + service does pan out, shares could be cheap relative to future earnings.
Disclaimer: This post is for informational purposes only and does not constitute investment advice. Please do your own due diligence or consult a financial professional before making any investment decisions.