While not yet profitable, this software company saw its revenues jump 38% last quarter, and its loss of $0.12 was much better than the Street’s estimate of -$0.21.
Smartsheet Inc. (SMAR)
From Canaccord Genuity Research
Smartsheet posted solid FQ3 results; revenue topped expectations, billings growth snapped back to +35, new customer metrics saw a rebound with larger cohorts, and enterprise customer growth was a particular bright spot. We’ve been getting a fair amount of inbound inquiries on SMAR, presumably compelled by a still discount valuation, so let’s think through the bull/bear debate for a moment.
On the positive side, this is a huge category that’s likely to create several significant firms. The stock is comparatively inexpensive at 13x EV/R on C2022E, management does a nice job of keeping expectations measured, and we should see a reacceleration in revenue growth as comps ease next year.
In terms of fundamentals, Smartsheet operates with a super-efficient, land and expand GTM (growth-to-market) model and the firm is pretty regular when it comes to value-add innovation. Recent introductions of process automation (Bridge), no code app creation (WorkApps), and hints of a user interface refresh come to mind. Finally, this is a space that’s likely to see consolidation, with Adobe/Workfront potentially being the first of several tie-ups, and we think SMAR could be an attractive target for buyers seeking a larger asset.
In terms of challenges, this is a crowded space. If it’s hard for us to clearly express differentiation among the vendors in the market, we have to think that IT buyers at least somewhat face the same challenge. Furthermore, while there’s certainly value in organizational alignment/collaboration, it’s not the most tangible ROI, which makes us wonder where project management falls on IT priority lists that are overburdened with digital transformation initiatives. The more that use cases skew towards workflow automation, the higher they’d rank, we suspect.
Finally, Smartsheet today has a presence in 75 of the Fortune 500 and 90 of the Fortune 100, which is great, but taking those from departmental to enterprise adoption is a slow process. We suppose therein lies excitement in the opportunity.
We think the positives outweigh the negatives here, and at these valuation levels, we find the risk/reward favorable. We continue to think growth investors should continue to have at least some exposure to SMAR. BUY.
David Hynes Jr., Luke Morison, CFA, and Daniel Reagan, Canaccord Genuity Research, canaccordgenuity.com, December 8, 2020