WKME - WalkMe: New Software Category Leaves Plenty Of Room For Growth

2023-04-18 18:32:13 ET

Summary

• WalkMe is an early entrant in the Digital Adoption Platform space.
• The COVID-19 pandemic has further accelerated the shift towards digital transformation, with enterprises looking to increase their digital transformation activities.
• The global enterprise spend on digital transformation is projected to reach $3.4 trillion in 2026.
• I maintain a buy rating on the stock with an end-of-year price target of $16 based on an assumed EV/Sales multiple of 4x applied to the consensus 2024 revenue estimate of $308 million.

Thesis

WalkMe Ltd. ( WKME ) currently holds a leading position in the Digital Adoption Platform market, which I believe has significant potential as an end market. This is because tools like WalkMe help address one of the most pressing challenges businesses face today - how to ensure that employees can efficiently use the growing number of software solutions required for their jobs. As more applications become available, I believe there will be a greater demand for solutions like WalkMe to help bridge the adoption gap. Additionally, I find the valuation of WKME attractive since its shares trade at a discount compared to the average multiple of other companies with similar growth rates of 30%-40%. I maintain a buy rating on the stock with an end-of-year price target of $16 based on an assumed EV/Sales multiple of 4x applied to the consensus 2024 revenue estimate of $308 million.

Market Overview

WalkMe is a company that operates in the Digital Adoption Platform software category, which it helped create and define. This software category emerged due to several large-scale secular themes, including the widespread adoption of cloud software and companies' efforts to adopt digital technologies to compete better. The enterprise software market has seen significant growth over the past decade, reaching $271.6 billion in 2021, and is expected to grow at an 11.3% CAGR to $419 billion by 2025 . This growth is expected to be driven, in part, by companies' digital initiatives and digital transformation investments, which have been accelerated by the COVID-19 pandemic. According to IDC, global enterprise spend on digital transformation is projected to reach $3.4 trillion in 2026.

Its Digital Adoption Platform is at the core of its offerings. It provides contextual workflow guidance, automation, and analytics features tailored to individual user needs. The DAP uses a UI-first, no-code approach and can be overlaid on top of existing applications without requiring API integrations. This allows enterprises to gain insights into how their employees and customers use their applications, and the resulting data can be used to optimize interactions going forward.

The platform is made up of multiple components, including some acquired through acquisitions , such as DeepUI, WalkMe Mobile, and some Analytics capabilities. The core technology behind the platform is DeepUI, which uses AI/ML intelligence to analyze app or website UIs in the context of a user's interactions. DeepUI is platform-agnostic , meaning it works on iOS/Android and MacOS/Windows, and can adapt to underlying changes made in the app or website. This allows for seamless navigation and reduces operational and maintenance costs.

The data compiled by DeepUI is ingested into Insights, WalkMe's analytics solution, which provides users with actionable insights through Smart Dashboards. Using WalkMe's DAP, enterprises can improve engagement and reduce costs while gaining valuable insights into their application usage.

WalkMe is Well Positioned

The company is addressing significant and often overlooked challenges that impact companies across various industries and sizes. It has developed a platform that addresses these issues, maximizes a business' digital investments, and facilitates the usage of digital apps by its target audience. Since its inception in 2011, WKME has established itself as the go-to platform for digital adoption, proving their viability in the long-run.

Having the largest library of Walk-Thrus and software usage data to feed its AI and ML engines gives WKME a leg up on the competition. In addition, its rising sales force and robust partner relationships make it ideally suited to seize a large portion of the market opportunity. Customers place a high value on the company's developing developer ecosystem and its well-known brand in the Digital Adoption niche.

The management team is highly regarded and drives a culture of continuous innovation. Its platform, market position, and management team make it a compelling investment opportunity.

Valuation

In my view, WalkMe has all the necessary elements to become the go-to Digital Adoption Platform for large enterprises. The company's DAP is built on a proprietary DeepUI foundation and can be easily implemented without coding or API integrations, making it highly versatile. Additionally, the company is expanding the scope of its platform to create a stronger competitive advantage while also investing in its sales team and expanding its partner network. These efforts should enable it to generate solid annual recurring revenue and revenue growth in the short term.

The fundamentals for them look strong relative to peers, with the acceleration in growth in CY22 particularly noteworthy. With the company and digital platform adoption industry still relatively unknown, I see an opportunity to buy into an underappreciated secular growth story in the digital process automation space. Hence, I maintain a buy rating on the stock with an end-of-year price target of $16 based on an assumed EV/Sales multiple of 4x applied to the consensus 2024 revenue estimate of $308 million.

Risks

There are a few potential challenges that the company may face as it seeks to grow its business. Firstly, if the company cannot maintain relationships with third-party technology partners, it may struggle to expand its customer base and ARR growth. Additionally, larger enterprise software vendors could offer competing solutions, limiting its market traction. Finally, the company's 39 largest customers account for a significant portion of its ARR, and failure to maintain these relationships or expand to new large-scale enterprises could also impact growth.

Final Thoughts

In my view, this company is well-positioned as the leader in the emerging Digital Adoption Platform market, and it has created a comprehensive ecosystem to capitalize on this opportunity. Despite its strong revenue growth and market position, WKME is trading at a significant discount to its peers, which I believe is unwarranted. Therefore, I see a compelling risk-reward opportunity. Hence, I maintain a buy rating on the stock with an end-of-year price target of $16 based on an assumed EV/Sales multiple of 4x applied to the consensus 2024 revenue estimate of $308 million.

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