Smartsheet Should Be More Excited Than It Gets (NYSE:SMAR)
This may come as a surprise to many investors, but the small and mid-cap technology space has quickly gone from a negative bubble in 2021 to a booming space of value stocks in 2023. Everyone has a risk appetite. but lost in the markets as we look at the continued rise in inflation, rising rates, and bank failures are all reasons why we should be in the fund.
But for investors willing to take on some near-risky lifestyle, now is a good time to pick stocks among the undergrowth of tech stocks. Smart series (NYSE:SMAR), in particular, is a great enterprise software name to buy for current shortages. The stock has given up all of its post-earnings gains recently, and the year has been relatively low, despite strong trends amid the tech slowdown:
My view on Smartsheet is still on buy hard. I think this is an up-and-coming software company in the country, adapting to its market niche while enjoying significant revenue growth from its installed base and leaning on its high margins to be liquid. . And while Smartsheet has acknowledged some impact from the macro environment on its ability to close deals, it doesn’t account for the significant impact that other software companies have cited.
For investors newer to this stock, here’s my long-term essay on Smartsheet:
- Remote work will continue to be the “new normal” –Now knowing that productivity won’t suffer as much as previously thought when teams go long distances, some companies are relaxing their expectations for workers to return to the office even after the pandemic has passed. Some companies have informed their employees that they prefer to work remotely. But remote teams need a workspace to work together, and tools like Smartsheet are perfect for that. This is especially true for distributed teams, where people are in different locations, some in person and some far away: tools like Smartsheet help maintain geographic distance.
- Smartsheet is moving to higher and higher fees, with increasing delay rates – As Smartsheet has proven its usefulness and eased its muscles to become a more popular real estate company, the company has been able to sign higher prices. In its most recent quarter, its count of >$100k ACV customers grew 55% y/y to over 1k such customers. The average customer is renewing their relationship with Smartsheet: the net profit retention rate is close to 130%, which is higher than most other SaaS stocks.
- Hypothetical software with general use cases – Smartsheet applies to most businesses and almost any team or function within a company, so the market is broad.
- High gross margin – Smartsheet’s 80%+ pro forma gross margin is among the highest in the software industry, and the company is able to achieve significant operating results while weighing it.
- Almost as effective – Despite strong growth, Smartsheet was able to generate a break-even income (on an operating margin basis), demonstrating the leverage in the software business model made possible by high margins.
On the whole, Smartsheet is pretty simple. At current share prices of around $41, Smartsheet trades for a market capitalization of $5.42 billion. After we took $344.7 million of cash on Smartsheet’s new balance sheet, the company’s profits. The enterprise value is $5.07 billion.
So far, for the current fiscal year, Smartsheet has led to $943-$948 million in revenue, representing 23-24% y/y growth (find out about the company that has achieved to a $1 billion annual turnover rate, which is mid-20s. The rate of growth in this economic environment is quite impressive):
In the middle of this guidance range, Smartsheet trades in 5.3x EV/FY24 revenue. During the pandemic, the company on this page offers many discounts for young people. While it may be difficult for tech stocks to reach that peak again, I think Smartsheet’s combination of balanced growth and good operating margins is worth it at least. 7x EV/FY24 earnings many, stating the price target of $53 and 29% more than current levels.
Stay here and invest in the diving season.
Now let’s take a look at Smartsheet’s quarterly earnings in more detail. The Q4 earnings summary is shown below:
Smartsheet’s revenue rose 35% y/y to $212.3 million in the quarter, beating Wall Street expectations of $205.8 million (+31% y/y) due to a four-quarter- period. Like most companies, Smartsheet was plagued by macro difficulties during the quarter, which delayed turnarounds. Here’s what CEO Mark Mader said on the Q4 earnings call:
Despite these successes, we have seen a changing macro environment negatively impacting expansion rates across consumer segments. However, while these macro trends are less favorable, our enterprise customers continue to show rapid growth rates. Our product investment and go-to-market strategy is focused on winning the enterprise. And we have seen great success in this area.
We now have over 3,300 large enterprise customers, defined as managing over 10,000 employees. ARR from this customer segment exceeded $260 million, up 40% in FY ’23. We believe this segment alone represents a multi-billion dollar revenue opportunity for Smartsheet.
Although we may have seen some companies considering investing in this environment, we believe that in the long term, enterprises, especially large enterprises, will continue to be the best way to block profitable growth for a long time, and no one in this category wins. industry like ours.”
Bills growth in the quarter was up 28% y/y to $286.7 million. While this rate is slower than revenue growth, the 28% y/y increase in receivables from Q4 (and the fact that Smartsheet generated deferred revenue of over $75 million in the quarter) we trust the company’s guidance of 23-24 % y/y revenue growth in FY24.
Net income retention rates in Q4 remained at a record high of 125%, reflecting healthy expansion rates in the enrollment base. The company expects revenue retention rates to only soften to the high 110s throughout FY24, while churn remains at ~4%.
Smartsheet is also taking advantage of a flexible macro environment to lower its cost structure without affecting sales force. The environmental performance benefit provided by Smartsheet’s ~80% gross margin, along with the company’s efforts to address opex, helped Smartsheet increase pro forma operating margins to 4% in the quarter , it is 13 point improvement over the previous year Q4.
We also note that Smartsheet expects ~4-5% pro forma operating margins for the full year FY24, which represents a ten point improvement over FY23 at -5%. So even during the slowdown, Smartsheet is working to fill its bottom line.
To me, the fact that Smartsheet is trading at ~5x multiples of earnings despite strong 20-year revenue/bill growth and good pro forma operating margins means there is a lot of upside when investors consider small/mid-cap stocks to be better. Take advantage of the recent dip as a sales opportunity.