Clarivate (NYSE: CLVT) may not be the cheapest AI stock worth buying, but it is inexpensive and set up to rebound strongly over the next few quarters. Trading at a mere 7.5x its earnings outlook for 2025, it is a super-deep value compared to leading AI plays, and the estimates for earnings growth underestimate the company’s potential.
Clarivate is an information services company serving academia, governments, the life sciences, and the health industries. It is heavily investing in AI. According to its website, Clarivate creates, develops, and uses AI. Because its business is data-centric, AI can help it in many ways, including increased automation to aid margin and enhanced insights to leverage revenue.
What does Clarivate do, and how does it make money? Clarivate uses its platforms to explore and manage academic research. The company provides services like curated content collections for institutions and a platform for publishers to connect and launch content.
Future Growth for Clarivate: Analyzing the Inflection Point
The Q1 results were mixed, with revenue falling compared to the prior year offset by outperformance and expected growth to resume in the second half. The company posted revenue of $621.2 million, a decline of 1.3%, but worse was expected. Subscription revenue was strong, with a gain of 2.4% offset by decreased transactions and recurring revenue.
The earnings news is equally mixed, but guidance offsets it. The adjusted earnings are down compared to last year and flat compared to the consensus targets at MarketBeat.com but sufficient to drive free cash flow. Free cash flow was solid at 18% of revenue and helped sustain the strong balance sheet by allowing early debt repayment. The cash balance fell slightly in Q1 due to the timing of payments and acquisitions but remains healthy, and leverage is low at less than 1x equity.
Guidance isn’t robust but provides a catalyst for the market. The company guided the outlook for revenue and earnings in alignment with the analyst forecast for 0% to 2% top-line growth in fiscal 2024. The salient detail is that 0-2% annual growth indicates an inflection to quarterly YoY growth sometime mid-year and will accelerate as the year progresses. Because the guidance for Q2 is for a 2.7% contraction, the inflection will likely take place in Q3 and lead to a mid-to-high single-digit advance in the year's second half.
Analyst Sentiment and Clarivate's Stock Price Outlook
The problem with Clarivate’s share price today is that Q2 will be weak, and the inflection won’t happen until the next quarter. This has analysts lowering sentiment ratings and price targets, helping to pressure the market lower, but the sell-off is overdone. The stock is trading well below the lowest price target set by Wall Street analysts, offering a 7% upside at the low end of $6. The consensus is closer to $7.75, providing a more robust 40% upside for this Hold-rated stock.
Although institutional activity is not robust on a quarter-to-quarter basis, it is bullish for this market. Institutions have bought this stock on balance every quarter since the IPO and own more than 85% of the shares. With this force in play and short interest relatively high at 8%, a short-covering rally could commence anytime. The Q2 results are due in early August and could be a catalyst because the bar has been set very low.
Clarivate is in Rebound Mode: Stock Price Reversal Imminent
Clarivate stock price has been trending lower and recently hit a new low. The mandatory conversion of preferred shares caused the new low, but now a bottom is in play. The market rebounded strongly and confirmed support at the previous low, creating a potential Head & Shoulders pattern. With this in play, a retest of the critical resistance near $5.85 is likely. If it can move above that level, the market should easily reenter the analyst target range.
