This summer has provided investors with plenty of stocks -- plant-based meat substitutes and ridesharing apps, for example -- that have become the talk of the town. While these stocks may go on to produce market-crushing returns, savvy investors are frequently on the lookout for less-popular stocks -- ones that are unfamiliar today but may emerge as blockbusters tomorrow.
Among these unfamiliar names, AquaVenture Holdings (NYSE: WAAS) certainly warrants attention. Proclaiming itself as the "world's leading water service provider," AquaVenture Holdings may not be on the tips of investors' tongues when they gather around the water cooler, but there are reasons to believe that the company deserves recognition.
Some background to get your feet wet
Completing its initial public offering in October 2016, AquaVenture Holdings operates under two platforms: Seven Seas Water and Quench. In addition to operating 11 desalination plants, which treat more than 8.5 billion gallons annually, Seven Seas Water provides both wastewater treatment solutions and water reuse services to customers throughout the Caribbean and South America.
But 56% of AquaVenture's revenue in 2018 came from Quench, which provides point-of-use (POU) water filtration services to customers in North America. Through its direct sales channel, Quench serves more than 50,000 rental customers, leading it to characterize itself as the "largest dedicated provider of POU filtered water and related services in the U.S."
Since AquaVenture's IPO, Quench has achieved significant growth on two fronts. While the number of company-owned POU installed units has grown 65%, the number of customers in its independent dealer network has risen from zero to 250 dealers/retailers during the same time period.
A look at the financials
While some businesses have found it challenging as a publicly traded company, AquaVenture Holdings has proven to be adept at steering its ship under shareholders' watchful eyes. Some key metrics for AquaVenture Holdings since its IPO illustrate the company's success.
|Revenue||$145.6 million||$120.8 million||$111.6 million|
|EBITDA||$27.5 million||$19.4 million||$18.1 million|
|Operating cash flow||$26.9 million||$19 million||$11.5 million|
In terms of revenue, AquaVenture has seen a rise -- thanks to 17 acquisitions and organic growth -- since going public, and according to management's recent 2019 forecast, the growth is poised to continue. Should the company achieve the midpoint of its guidance and report revenue of $195 million in 2019, it will represent a compound annual growth rate of more than 20% since 2016.
The growth, moreover, isn't only evident on the top line -- the company has seen EBITDA grow over the past three years as well. Besides the nearly 52% increase in EBITDA from 2016 to 2018 that should please investors, the company's success in expanding its EBITDA margin from 16.2% in 2016 to 18.9% is noteworthy.
The company's cash flow illustrates another way in which it has prospered. Thanks to a business model that features long-term contracts for its desalination, wastewater treatment, and water reuse solutions, AquaVenture gets strong, consistent cash flows as evidenced by the more than 133% growth in operational cash flow over the past three years. And investors yearning for even stronger cash flow may be glad to see the company's growth of free cash flow from negative $5 million in 2016 to $1 million and $7 million in 2017 and 2018, respectively.
Sailing the sea of opportunity
AquaVenture Holdings may not be a name that's synonymous with growth stocks, but there are plenty of growth opportunities available to the company. It cites data from Global Water Intelligence that estimates desalination capital expenditures exceeded $4.8 billion in 2018 and will rise to over $8.6 billion in 2021. Management recognizes the potential to expand its portfolio of desalination assets in the Caribbean and South America, but it also sees opportunities in the Middle East, Africa, and North America.
Besides desalination, AquaVenture recognizes the U.S. water cooler market as another avenue for growth. According to the company, it has less than 10% market share of commercial point-of-use systems, and it recognizes the possibility for numerous acquisitions in this highly fragmented market.
Lastly, management sees potential for growing its wastewater treatment and water reuse businesses as water scarcity increases in the coming years. According to a 2017 study from the WateReuse Association, the U.S. wastewater reuse market was about $1.8 billion, and it's forecast to grow 27% by 2027. And that's only domestically; the company believes it can expand into international markets as well.
A final word before boarding the ship
While the company's track record -- albeit short -- of revenue, earnings, and cash flow growth may put the wind in some investors' sails, it's important to recognize that AquaVenture Holdings, like any company, faces challenges. In particular, its heavy reliance on leverage is a significant concern. It ended 2018 with a net-debt-to-EBITDA ratio of 9.8, suggesting that the company may not be for investors looking to avoid risk. This shouldn't immediately disqualify it from consideration, but it should be closely monitored.