2024-01-21 04:01:22 ET
Summary
- The Collaborative Work Management (CWM) market is often misunderstood by investors, leading to a low valuation of some companies in this sector.
- Smartsheet stands out as a leader in the CWM market, demonstrating robust growth, solid financials, and a compelling growth strategy.
- Smartsheet's valuation appears to lag behind its peers, indicating an undervaluation by the market.
Thesis
Smartsheet Inc. ( SMAR ) is a leader in the Collaborative Work Management (CWM) market, providing solutions that enable teams to plan, execute, and manage their work collectively. The company has been growing rapidly in the past few years, reaching $1 billion in annualized revenue last week. However, despite its impressive performance and strong competitive position, Smartsheet is undervalued by the market, trading at a lower valuation relative to its peers.
We believe that the Collaborative Work Management market is misunderstood by investors, who fail to recognize the value and potential of CWM solutions. This leads to a low valuation of some of the companies in this sector. In this article, we will examine the CWM market, Smartsheet's competitive edge, financials and its relative valuation compared to its peers.
The CWM Market is Not Well Understood by Investors
The Collaborative Work Management (CWM) market is often confused with the Collaborative Applications market, which is a large and competitive market worth $60B and growing at 10% CAGR (source: Mordor Intelligence). This market is dominated by established players like Microsoft, Google, IBM, Adobe, Cisco, Salesforce, etc. and breaking into this market is almost impossible.
Collaborative Applications Market (Mordor Intelligence)
However, the CWM market is different from the Collaborative Applications market, as it focuses on the work and outcomes, not the applications. CWM products offer features for work planning, collaboration, content creation, workflow, automation, reporting, analytics, dashboards, and many other use-cases. It has overlapping areas with the collaborative applications market, but it is positioned on a higher level and covers many other adjacent markets that are beyond the scope of collaboration apps. We think that these adjacent markets are the main growth drivers of the CWM market.
monday.com ( MNDY ), a CWM competitor of Smartsheet, estimates the CWM market to be $100 billion and growing at 14% CAGR (see below). We agree with this estimate.
CWM Market TAM (monday.com Investor Presentation)
We also think that the market is largely untapped, as all the CWM vendors are growing much faster than the 14% market growth. The table below shows the 4 top CWM companies and their 3-year CAGR.
CWM Peer Growth Comparison (Seeking Alpha)
These numbers indicate that the CWM market is still in its infancy and has a lot of room for growth and innovation. The uniqueness of this market is that the CWM vendors are not only competing among themselves, but also with plenty of other categories like the traditional collaboration and productivity apps, IT service management and automation tools, data visualization tools, software development and DevOps platforms, CRM solutions etc. We believe that the CWM vendors that can provide the most value, flexibility, and integration to their customers will have the advantage in this market. Smartsheet stands out as one of these vendors with a compelling value proposition.
Smartsheet's Growth Strategy is Compelling
Smartsheet has ambitious targets, and its growth strategy is based on three key pillars:
- International Expansion - Currently 16% of Smartsheet's revenue is from customers outside the United States. Company believes that there is significant opportunity to grow internationally and is building sales capabilities accordingly. Company has opened international offices in the U.K. and Australia which are the initial steps of its expansion strategy.
- Grow into Enterprise and Public Sector - Smartsheet aims to increase its penetration and adoption in large enterprises and public sector organizations, where it sees strong demand for its platform. The company has been improving its large customer base, ending the Q3 quarter with 19,389 customers with annualized contract values ((ACV)) of $100,000 or more, a 32% year-over-year increase. We think that this is good progress on its enterprise growth strategy.
Smartsheet Annualized Contract Value (Smartsheet Q3 2024 Earnings)
- Enhance the Enterprise Platform - Smartsheet invests heavily in building new features and capabilities, spending around 28% of its revenue on R&D ( 10-K ). The company continuously innovates and launches new features on its platform. Smartsheet also enables integrations with popular third-party platforms such as Microsoft, Google, Slack, Box, Adobe, DocuSign, and Dropbox, to increase user adoption and provide more platform value.
Smartsheet's Financials are Improving
Smartsheet has been improving its financial performance, as it demonstrates positive revenue growth, FCF, and operating margin expansion while maintaining a healthy balance sheet. During 2024 Q3 , total revenue was $245.9 million, an increase of 23% year over year, and ahead of Wall Street's expectations of $241 million. Calculated billings were $268.5 million, representing year-over-year growth of 22% and quarterly acceleration.
Smartsheet Billings (Smartsheet Q3 2024 Earnings)
Smartsheet reported a non-GAAP operating margin of 8%, compared to -2% in the same quarter of the previous year. This indicates operational discipline and great progress toward profitability as it is scaling its business. Company also generated $11.4 million in FCF, or 5% of total revenue, compared to -$4.6 million, in the same quarter of the previous year. Smartsheet guided $130 million FCF for FY 2024 which reflects the confidence in its long-term growth prospects.
Smartsheet Operating Margins and FCF (Smartsheet Q3 2024 Earnings)
In terms of balance Sheet, Smartsheet ended the quarter with cash of $568.7 million, compared to $483.9 million in the same quarter of the previous year. The company also had no debt on its balance sheet, indicating that it has a strong liquidity position and financial flexibility.
Valuation: Smartsheet is Mispriced
Smartsheet is a category leader as per Gartner's Magic quadrant for Collaborative Work Management (see below). According to Gartner , Smartsheet is recognized for its market vision and ability to execute, as well as its strong customer satisfaction and retention rates.
Gartner Magic Quadrant for CWM (Gartner)
Despite being a leader in the Collaborative Work Management (CWM) market, Smartsheet is trading at a much lower valuation than its peers (see below table).
Peer Valuation Comparison (Seeking Alpha)
For instance, Smartsheet and Atlassian ( TEAM ) have comparable revenue growth rates, but Smartsheet's P/S ratio is less than half of Atlassian's. This suggests that the market is overlooking Smartsheet's potential. A simple calculation shows that if Smartsheet had the same P/S ratio as Atlassian, its share price would be around $120. Of course, this is a simplistic comparison that does not take into account other factors, but it illustrates the potential upside for Smartsheet.
Also, we are not discounting Atlassian's valuation here but rather highlighting the opportunity for Smartsheet to close the valuation gap as a category leader that continues to deliver strong growth, profitability, and customer satisfaction.
Risks
- Competition : The biggest risk for Smartsheet is competition. The CWM market is multi-front and highly competitive with many players, If Smartsheet cannot keep pace with technological or market changes, its business will suffer. Also, if any of the incumbents like Adobe, Google, or Microsoft, introduce any CWM type products to the market, it will be very hard for Smartsheet to survive.
- Macro Uncertainties : Smartsheet is a global company and is exposed to macroeconomic uncertainties, geopolitical conflicts and other disputes that may affect its customer demand.
Conclusion
Smartsheet stands out as a leader in the Collaborative Work Management (CWM) market, demonstrating robust growth, solid financials, and a compelling growth strategy. The CWM market presents significant untapped potential, with Smartsheet positioned to capitalize on this opportunity.
Despite its achievements, Smartsheet's valuation appears to lag behind its peers, indicating an undervaluation by the market. We think that as a category leader, there is a potential upside that is not fully reflected in its current share price, so we rate Smartsheet as a Buy.
For further details see:
Smartsheet: A Mispriced SaaS Leader