FiscalNote (NOTE) AI SaaS Analytics

FiscalNote ticker symbol NOTE serves a global, diverse customer base that includes businesses (including over half of the Fortune 100), government agencies, law firms, professional services organizations, trade groups and non-profits. They serve all three branches of government including the White House and Dept. of Defense.

The company was founded in 2013 by Tim Hwang and his childhood friends Gerald Yao and Jonathan Chen. They secured initial investment from notable investors including Mark Cuban and Jerry Yang.

They are the market-leading AI platform for the regulatory, legislative policy and geopolitical intelligence sectors.

To put their software in simple terms FiscalNote is like a super-smart news alert system for laws and rules that: Watches government websites and documents 24/7. It summarizes complicated legal documents into simple language and alerts you when important changes happen.

Imagine you own a business and need to know about new laws that might affect you: FiscalNote software gives quick answers instead of reading thousands of pages of government documents. Saves money and time instead of hiring expensive lawyers to explain everything. FiscalNote's software sends you a simple alert about new rules and explains how they affect your business.

In the most recent conference call management calls the software "essentially the Bloomberg terminal for regulatory, legislative and strategic risk, drawing upon a deep reservoir of technical expertise, proprietary data and analytical tools." The Bloomberg terminal is the top tier terminal used by finance professionals.

One of the positives I see about the company is that it still has founders in leading positions. Tim Hwang is a co-founder and is the current Executive Chairman. Gerald Yao is another co-founder and is Chief Strategy Officer. Tim Hwang was the CEO since the start and just a month ago is replaced by Josh Resnik at CEO.

Financials

I looked over the yearly financial report for the 2023 year. They generated total revenues of $132.6 million and $113.8 million for the years ended December 31, 2023 and 2022, respectively. So revenue grew 16% which is good growth.

They get recurring revenues through the subscription-based model, which accounts for approximately 90% of total revenues.

In 2023 gross profit margin was 82% vs 80% in 2022. These are really good gross margins and they should be able to get a net profit with these kind of margins. I'm a little surprised this net profit isn't happening now, however I see a rising trend in earnings per share the last four quarters. If this trend continues ceteris paribus they should have profitability in a year or less.

I did see in the quarter ending in March in '24 they put up a cool $.39 a share in net income or $50.5 million in net income. This was good to see because it shows that they are capable of the feat.

In the last quarter revenue was down -13% qoq. A positive was the quarter represented a $2.7 million improvement in adjusted EBITDA year over year and marked the fifth straight quarter of adjusted EBITDA profitability for FiscalNote. I really want to see more revenue come in this year though.

On the Q3 '24 earnings call they forecasted $9 million in adjusted EBITDA marking the first full calendar year of adjusted EBITDA profitability.

Valuation

I see this stock as a potential growth stock. The way I like to look at big picture valuation on growth stocks is the price to sales ratio P/S. It shows how much you are paying for the sales. Right now it's a low valuation at just 1.4 X trailing twelve month sales.

I've been looking at a lot of cheap companies lately and none of them were even less than 1.5 X sales. The big sales growth isn't here right now and the market is pricing this in. I'm bullish on the industry growth so I see a good discount here just from a sales standpoint. I'm optimistic they can grow the top-line 10%.

Industry growth

The global ai-regulatory tech industry according to market.us is expected to be worth around $29.6 Billion by 2033, from $1.3 Billion in 2023, growing at a CAGR of 36.7% during the forecast period from 2024 to 2033. That is s very good CAGR.

Institutional holders

21% of NOTE's shares are held by Maso Capital Partners. They are a Hong Kong-based hedge fund established in 2012 by Manoj Jain and Sohit Khurana, both former managing directors at Och-Ziff's Asia fund. This holding percentage is 7 times more than the next largest holders being Morgan Stanley, Vanguard and Blackrock.

Maso has about 36 positions and their top holding is NOTE which is the largest position at 35%. Other top holdings are SOHU, YY, VNET Group and i-Shares Russell 2000.

Technical Analysis

Since the IPO, the stock has never gotten enough sustained buying to put in a major technical bottom and get lasting momentum. It's threatening this here but has to see $1.61 a share hold first.

Final Thoughts

For a company as small as this they have a strong business being subscription based and with a healthy diversity of clients. The big play here is as more companies start using AI they are poised to benefit and grow fast. The current valuation makes sense if this happens.

Also, having such big gross margin makes them likely to get over the net income hump. This will likely be a positive catalyst that boosts the stock.

Disclosure: I am long stock