MANH - Manhattan Associates: Q2 Success Tempered By Overvaluation

2023-07-26 12:52:03 ET

Summary

• Manhattan Associates, Inc. reported strong Q2 results with a non-GAAP EPS of $0.88 and revenue of $231.07M, beating expectations due to a surge in cloud and services revenue.
• Despite impressive performance, potential headwinds such as dependency on the cloud market, aggressive hiring plans, and unproven AI initiatives could pose risks.
• The company's high P/E ratio suggests possible overvaluation, leading to a recommendation of a holding pattern for investors.

Thesis

In this article, I delve into Manhattan Associates, Inc. (MANH) and its Q2 2023 earnings report , revealing an impressive quarter characterized by a non-GAAP EPS of $0.88 that beat by $0.16, and revenue of $231.07M that beat by $14.4M. However, I argue that the potential headwinds, along with the company's high P/E ratio and possible overvaluation, lead me to recommend a holding pattern for now.

Company Overview

Manhattan Associates, Inc., an Atlanta-based software enterprise founded in 1990, specializes in creating, marketing, implementing, and supporting software tools for the streamlined management of supply chains, inventory, and cross-channel operations. Its signature offerings include Manhattan SCALE, a suite of logistics execution solutions encompassing services from trading partner management and yard management to warehouse management and transportation execution.

Manhattan Associates Q2 2023 Earnings Highlights

Manhattan Associates just reported an exceptional performance for Q2 , marking record revenues that grew by 20% to reach $231 million, alongside an adjusted EPS which rose by 28% to $0.88.

The firm has been able to consistently improve its revenue growth for nine quarters, a feat partly achieved due to its impressive 44% surge in cloud revenue and 23% growth in services revenue. According to management, despite the ongoing economic uncertainty globally, Manhattan's strong core business, high client satisfaction, and consistent investments in both R&D and workforce, affirmed its capacity to generate these quarterly gains.

The organization registered a 38% spike in RPO, pushing it just above the $1.2 billion mark. This indicates a strong demand for its mission-critical cloud services. A majority of the firm's bookings, over 80%, come from the retail, manufacturing, and wholesale sectors, which saw a variety of new cloud contracts secured across several industries.

Year-to-date, Manhattan's win rate has held firm at 75%, with a quarter of all new cloud bookings originating from newly acquired clients. Given the extensive range of sales categories and products, the company is confident about potential future growth opportunities.

Moreover, Manhattan's significant product activity is spurring growth in its services and pipeline. The company's professional services team successfully executed over 100 go-lives in the second quarter, and to support its growth, they're progressing steadily towards its target to hire around 450 new associates for 2023.

Overall, Manhattan appears to remain a dominant force in supplying store capabilities for order fulfillment. Almost 100,000 store associates utilize its cloud-native technology every day. Moreover, the firm has recently introduced native support for RFID within store applications, a move that markedly improves store inventory precision and curtails labor hours for store associates.

Performance

Beginning with MANH's USD 39.72 per share price from January 2015, the value has risen by nearly a 5-fold increase to USD 193.32 by July 2023, which significantly outpaced the benchmark S&P 500 Index (SP500).

Crunching the numbers, this translates into an impressive annualized return on investment of 20.31% for MANH, compared to just 9.75% for the S&P. Therefore, sans dividends, the total growth for a hypothetical initial investment within this medium-term period of $10,000 would translate to $48,671 for MANH, which is more than double the $22,170 generated by the S&P 500.

Valuation

Manhattan Associates is trading at a blended P/E ratio of 65.62x, which is significantly higher than the industry's norm of 40.44x (see chart below). Initially, this discrepancy suggests a strong market sentiment towards the company, with investors willing to pay a premium for its earnings.

And when we look at the company's operating earnings growth rate, which stands at a fairly healthy 11.48%, it suggests a strong underlying business performance that could potentially justify the higher P/E ratio. Still, the gap between the blended and the normal P/E ratio doesn't sit well for me because, while MANH exhibits strong growth characteristics, the high P/E ratio combined with a non-existent dividend yield and a modest EPS yield indicate that the company's stock may be overvalued.

Risks & Headwinds

A significant contributor to Manhattan's impressive performance has been its cloud business, which reported a stellar growth rate of 44% . However, with great dependency comes great risk. Manhattan is, in essence, heavily tethered to the cloud market. A downturn in this market, be it from increased competition, regulatory scrutiny, or a drop in demand, could make a notable dent in the company's earnings.

In terms of Manhattan's operations, another potential challenge that I've identified is their aggressive hiring plan. The company aims to bring onboard approximately 450 new associates in 2023. In today's hyper-competitive job market, where talent is in high demand , this could prove to be a tall order and if the company falters in attracting and retaining the necessary talent, it could hamper the smooth execution of their services and slow their pace of product development.

Lastly, turning our attention to Manhattan's foray into AI, the company has showcased some promising prototypes, which do possess potentially transformative capabilities. Yet, these are early days and the prototypes have yet to prove their commercial mettle. While AI could indeed be a game-changer, a degree of caution is warranted until these initiatives are tested, refined, and proven in real-world business scenarios.

Final Takeaway

Based on the information presented, I would rate Manhattan Associates as a "hold." The company shows strong growth and impressive performance, especially in cloud services, and has outpaced the S&P Index significantly. However, the high P/E ratio currently suggests potential overvaluation, and there are some uncertainties and risks related to dependency on the cloud market, an aggressive hiring plan, and unproven AI initiatives.

Also, based on the post-earnings negative stock price performance at the time of my analysis, I would also venture to note that the market may have anticipated more bullish numbers and could be taking profits off of the table after MANH's impressive +52% YTD returns. Therefore, investors, both new and existing, may have an opportunity to scoop up some shares at a better price should the sell-off continue in the near-term.

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