2023-09-08 12:41:46 ET
Summary
- Smartsheet Inc. customer adoption growth rates are showing signs of slowing down, posing questions about future adoption rates.
- Despite compelling revenue growth rates, Smartsheet's billings and some leading indicators raise concerns about potential revenue lulls.
- Smartsheet remains fairly priced but not excessively cheap, with investors paying a premium for the stock amidst its evolving growth dynamics.
Rapid Recap,
In my previous analysis on Smartsheet Inc. ( SMAR ), I took a cautious approach . At the time I said:
the most piercing insight from this earnings report is that its customer adoption growth rates appear to be maturing.
With another quarter of earnings results , there's some bad news and some good news from this report.
The bad news is that Smartsheet's customer adoption curves are slowing down. The good news is that Smartsheet has revised its higher free cash flow for this fiscal year, and it is now on a path toward $120 million of free cash flow.
All that being said, I believe that paying 50x this year's free cash flow is fair if one passionately buys into Smartsheet's prospects. But for me, I find the stock fairly valued, even though I recognize that the stock is soaring on the back of these results.
Why Smartsheet? Why Now?
Smartsheet empowers organizations to streamline work processes, collaborate effectively, and manage projects and tasks with greater efficiency. It provides a user-friendly interface for creating, tracking, and automating various types of work, including project management, task lists, and data analysis. Smartsheet enables teams to collaborate in real time, facilitating communication and information sharing. It offers customizable templates and features such as Gantt charts, reporting, and workflow automation to help businesses of all sizes optimize their work management and achieve better outcomes.
If you know either monday.com Ltd. ( MNDY ) or Asana ( ASAN ), Smartsheet competes against both of these in work management and project collaboration.
All three platforms offer tools and features to help teams manage tasks, projects, and workflows more efficiently. They enable collaboration, task tracking, and project planning, making them suitable options for businesses seeking to improve their work management processes.
With this background in mind, you can get a feel for the point I'm attempting to make. Just how competitive this space has become! And this is being reflected in its slowing customer adoption curve, see below.
SMAR Q2 2024
As followers of mine will know, I strongly believe that customer adoption curves are one of the most important considerations when it comes to a growth stock.
What you want to see is the top of the funnel delivering strong and stable customer growth rates. What you do not want to see is steadily decelerating customer adoption curves, which is what we see here. Case in point, last year's Q2 saw customer growth rates increasing by 24% y/y, whereas this year, they were nearly half the increase at 14%.
Naturally, this forces the question, what will its customer adoption rates be by next? Will Smartsheet's customer adoption have dipped to 10% y/y increases?
While we ponder over that thought, let's turn to discuss its outlook.
Revenue Growth Rates Remain Compellingly, With a But
Smartsheet delivers yet another mid-20s% CAGR for fiscal 2024. As its comparables become easier as we head into fiscal H2 2024, we should expect its revenue growth rates to continue delivering mid-20s% CAGR, right?
Well, here's where the story takes yet another unexpected twist.
Note, billings are a leading indicator of revenue growth rates will move towards.
If you have billings meaningfully lower than the recognized revenues, that will mean that there's likely to be a substantial amount of pull forward in revenues, which will leave a lull in bookings in the next several quarters. Bookings that will need to be found to reaccelerate future revenue growth rates.
And as a growth stock, you don't wish to see that. Indeed, investors backing a growth stock want to be bedazzled, after all, that's why they are paying the premium for this stock.
SMAR Stock Valuation -- Remains Richly Priced
As you can see here, Smartsheet is still being priced at around 6x forward sales. Despite delivering 5 consecutive quarters of slowing growth rates, investors continue to pay 6x forward sales for Smartsheet.
I'm not going to argue that it's an exuberant valuation. But I don't believe it's fair to call this a bargain basement either, particularly given that some of its most important leading indicators are pointing in the wrong direction.
To put this in a different perspective, despite Smartsheet raising its free cash flow profile for fiscal 2024 (only 6 months left to this fiscal year), from $100 million to $120 million, the stock is still being priced at 50x forward sales. Whilst I have to admit, this is not expensive, by any measure, I don't find it particularly jaw-dropping cheap either.
The Bottom Line
Smartsheet Inc. recent earnings report brings a mix of news – while customer adoption curves are slowing down, Smartsheet has upwardly revised its free cash flow projection for this fiscal year, aiming for $120 million in free cash flow.
This reflects the company's ongoing efforts to balance growth with financial stability. Despite Smartsheet Inc.'s stock's recent surge, I find it fairly valued at 50x this year's free cash flow, acknowledging its potential but also the challenges it faces in a competitive market.
The slowdown in customer adoption rates raises questions about future growth, and the stock's valuation, while not exorbitant, doesn't strike me as remarkably cheap given these factors. Investors should keep a watchful eye on Smartsheet's ability to sustain its momentum in an increasingly competitive landscape.
For further details see:
Smartsheet Earnings: Steady Progress In A Fairly Priced Stock