Goldman Sachs analyst Adam Hotchkiss downgraded E2open Parent Holdings (NYSE:ETWO) from Neutral to Sell and lowered the price target from $3.5 to $2.9. The stock fell.

Despite year-to-date stock underperformance, Hotchkiss noted that the lack of visibility into an organic growth turnaround, execution risk as the company works to refine its organic sales engine further, and the company's floating-rate leverage overhang will likely weigh on E2open Parent shares over the next 12 months.

As a business that has historically relied on acquired assets to support growth, E2open Parent's elevated leverage in a high-interest rate environment is limiting the company's ability to pay down debt to meet its leverage targets.

This cycle further limits the company's ability to invest in growth initiatives (including acquisitions).

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In addition, with the company roughly doubling in size through acquired assets over the last 4 years, the amount of new ARR required to accelerate growth materially has subsequently doubled, driving an increased burden on cross-selling (particularly in an environment where new logo acquisition has slowed) to reaccelerate growth.

Absent further acquisitions and with further maturation of E2open Parent's organic sales structure needed, Hotchkiss sought more clarity on the company's ability to reaccelerate growth beyond low single digits over the near-to-medium term.

E2open Parent's valuation is undemanding, but Hotchkiss noted that a rerating higher is unlikely absent an improvement in fundamentals, particularly given the multiple trough levels seen from peer-challenged growth software comps like Dropbox Inc (NASDAQ:DBX), RingCentral Inc (NYSE:RNG), and SolarWinds Corp (NYSE:SWI).

While Hotchkiss agreed with management's stated goals to pay down debt and focus on organic growth, he awaited evidence of progress toward these goals in a time of slowing organic growth relative to peers before considering turning more positive on E2open Parent stock.

With four consecutive quarters of declines in subscription revenue growth and lowered fiscal 2025 guidance, Hotchkiss noted it is prudent to be incrementally cautious around shares of E2open Parent despite the company trading near trough levels.

E2open Parents rapid conglomeration of assets and associated teams over the years has significantly increased the level of net new ARR needed to match historical growth levels on an organic basis, and meeting these levels of net new ARR at a time when larger transformation projects are increasingly being deferred (creating pressure on new logo growth) will likely remain a challenge for the company over at least the next 12-months.

Hotchkiss projected third-quarter revenue of $151.7 million and adjusted EPS of $0.04.

Price Action: ETWO stock is down 3.51% at $3.02 at last check Wednesday.

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