Why am I writing a post on a company I’m passing on? I’ve been meaning to do a good example post on how we evaluate a company, in hopes that others can use it as a template. Here’s my attempt.
[Here are some basics I like to see that set the tone for what kind of company we’re looking at, and why it might be interesting]
THE BASICS
What they do: SaaS incident response platform…from what I can tell means it is software that automatically sends texts and emails to the appropriate people when events trigger them. Yes this sounds boring, but it’s interesting because of its traction with important customers, many of our customers among them. The following post made me take another look, but unfortunately the poster did not realize that NRR and revenue growth rate are now lower: https://discussion.fool.com/pagerduty-pd-is-a-good-one-to-check-…
Mkt Cap: $1.9 Billion (77.2 shares outstanding)
TTM Revenue: $166 Million
PS ratio: ~11.5
Revenue Growth in most recent quarter: 36%
NRR most recent quarter 122%
GM in most recent quarter: 87% (!)
TTM Cash Flow: -$173,000 (basically break-even)
Cash: $351.4 million
[So from these basics we can see that this is a tiny company, relatively low PS ratio, but also relatively slow revenue growth. But it’s a SaaS company, has a great gross margin, they have a lot of cash and aren’t losing money, and their customer roster is impressive. Enough to be interested, but the question remains, why is growth not faster?]
IMPORTANT TRENDS AND OTHER SPECIFICS TO HIGHLIGHT:
NRR
Jul 2019 Q: 132% (130%+ for 8 quarters before this)
Oct 2019 Q: 129%
Jan 2020 Q: 122%
Apr 2020 guidance: 120% - 123%
YoY Revenue Growth
Apr 2019 Q: 49%
Jul 2019 Q: 45%
Oct 2019 Q: 37%
Jan 2020 Q: 36%
Apr 2020 guidance: 29% - 31%
Customer count
Apr 2019 Q: 11,600+
Jul 2019 Q: 12,000+
Oct 2019 Q: 12,000+
Jan 2020 Q: 12,700+
[These are just a few trends that seem relevant here. There could be other metrics to look at for other companies. But I’m showing a few things here that I will discuss below.]
INTERPRETATIONS AND CONCLUSIONS
When the CFO talked about the falling NRR on the most recent conference call, he said, We attribute most of the decline from the third quarter number to pockets of sales execution in specific territories where we have not managed to cover our existing accounts as effectively. They referenced this later in the call as well. I’m glad they care about this, and are addressing it, but sales issues are not a good thing. It’s reasonable that this has weighed on the stock.
They really do have all these great customers (Crowdstrike, Zoom, Shopify, etc etc etc) but the growth is underwhelming. Both revenue growth and overall customer growth. They also have almost 13,000 customers and $166m in TTM revenue, so a lot of these customers must be extremely small and not pay them more than a few thousand dollars a year. They talk about large new sign ups and even that Of the top 100 new customers we partnered within fiscal 2020, 68 of them subscribed to more than one product. Well, then why aren’t they large enough to move revenue growth rate higher? I think this is another instance of story vs execution (a la TTD). It’s a little hard to imagine a huge TAM here, although they say it is $100 billion (which I find humorous).
The valuation and the story are attractive, but the growth rate isn’t. This stock could do well for a number of reasons (maybe growth accelerates?), but it could also go nowhere for a while. It’s simply not a “heck yes,” so for me that means it’s an easy “no.”
Bear
