Smartsheet: The Best Deal in the Software Industry (NYSE: SMAR)


Edwin Tan

As momentum for a year-end rally builds, investors should favor their stock selection over growth-oriented value stocks that have been badly beaten this year. When growth becomes “popular” again, those beat names that have a lot of valuation chord for rise have huge potential to beat the S&P 500.

Smart Sheet (NYSE: SMAR), in my opinion, is an excellent stock that fits this bill. This enterprise software platform helps distributed teams collaborate and track project milestones, a well-established tool that has been deployed to over 90% of the Fortune 100 (including names like American Express (AXP) and Procter & Gamble (PG), among others).

Despite continued fundamental strength, Smartsheet has fallen dramatically this year due to weakened sentiment. Instead of choosing to see Smartsheet for a relatively young company that continues to grow and expand, investors sold the company for its high GAAP losses. Since the start of the year, the stock has lost 60% of its value:

Data by YCharts

My advice here: don’t forget the power of the software business model and why investors were so drawn to SaaS names before this year’s correction. Software vendors invest heavily in product development, sales, and marketing early in their lives, casting dark red ink over financials. Yet with high gross margins and persistent recurring revenue contracts that tend to grow over time as customers increase their purchases, software companies eventually become highly profitable businesses – all it takes is foresight and the will to look beyond the short term.

Due to the continued decline of Smartsheet despite strong fundamental performance, I am updating my view on Smartsheet to very bullish. Don’t miss the opportunity to buy this stock at a very cheap price before a possible market recovery at the end of the year.

For investors unfamiliar with the name, here are the top reasons to be bullish on Smartsheet:

  • Remote work will continue to be the “new normal”. Now realizing that productivity doesn’t suffer as much as originally thought when teams move away, some companies are relaxing their expectations for employees to be fully back in the office even after the pandemic subsides. Some companies have even let their employees know that it’s okay to work remotely indefinitely. But remote teams need a workspace to collaborate, and tools like Smartsheet are perfect additions for that. This is especially true for distributed teams, where people are in different places and some are in person while others are remote: tools like Smartsheet help limit geographic distance.
  • High gross margins. Smartsheet’s pro forma gross margins of over 80% are among the highest in the software industry and provide the company with significant operating leverage as it scales.
  • Smartsheet is moving towards larger and larger transactions, and expansion rates remain high. As Smartsheet proved its worth and built its muscle as a larger public company, the company was able to sign bigger deals. In its most recent quarter, its number of ACV > $100,000 customers grew 74% year-over-year to over 1,000 such customers. The average customer also improves their relationship with Smartsheet: net revenue retention rates are around 130%, which outpaces most other SaaS stocks.
  • Horizontal software and broad use cases. Smartsheet is broadly applicable to virtually any industry and virtually any team or function within a company, expanding its addressable market.
  • Expand its product platform. Smartsheet made its first major acquisition in 2020 of a company called Brandfolder, which helps businesses manage and run analytics on their digital web content. At the end of 2021, the company also released a premium version of its product called Smartsheet Advance. Continued product rollouts could lead to expanded use cases and greater TAM for Smartsheet.

And despite these strengths, Smartsheet’s year-to-date declines have made its stock incredibly attractively valued. At the current share price near $31, Smartsheet trades at a market capitalization of $4.06 billion. After deducting the $446.7 million in cash from the company’s most recent balance sheet, the company’s earnings the enterprise value is $3.61 billion.

For the current fiscal year FY23 (which for Smartsheet is the year ending January 2023), Smartsheet achieved revenue of $756-761 million, representing 37-38% growth in year-on-year, up slightly from a previous range of 36-37% y/y growth.

Smartsheet Insights

Smartsheet Insights (Smartsheet Q1 Investor Presentation)

Amid this revenue outlook, Smartsheet is trading at just 4.7x EV/FY23 turnover – which is an incredibly low multiple for a software company growing >40% y/y.

The bottom line here: There is a huge mismatch between Smartsheet’s fundamentals at its current trading levels. While it may take some time for sentiment to recover on Smartsheet, the company’s latest trend of beating and rising quarters should help lift investor sentiment over time. Don’t pass up this rare and overlooked opportunity.

Download Q1

Now let’s take a closer look at Smartsheet’s latest quarterly results. The first quarter revenue summary is shown below:

Smartsheet Q1 Results

Smartsheet Q1 Results (Smartsheet Q1 Investor Presentation)

Smartsheet’s first-quarter revenue grew 43% year-on-year to $168.3 million, beating Wall Street expectations of $162.5 million (+39% year-on-year) with a margin of four points. Revenue growth also kept exactly the same pace as last quarter’s 43% year-on-year growth rate.

Now, a potential yellow flag for Smartsheet’s growth trajectory is billing. As software investors know, billings are a better indicator of a company’s long-term growth potential than revenue, because it takes into account deals signed during the quarter that won’t be recognized as revenue until after quarters. following. In the first quarter, Smartsheet billings were up 36% year-over-year, decelerating from the mid-40s of recent quarters. However, there could be an element of timing and linearity here, as Smartsheet had a very strong Q4 billing quarter in which billing growth outpaced revenue growth by five points.

Smartsheet Q1 Billing

Smartsheet Q1 Billing (Smartsheet Q1 Investor Presentation)

Smartsheet noted that so far it hasn’t seen tighter macro conditions affect its sales execution. This contrasts with many other enterprise technology companies, some of which have reported longer transaction cycles as companies cut spending in anticipation of a recession.

Here are some qualitative comments on the company’s go-to-market results from remarks prepared by CEO Mark Mader during the first quarter earnings call:

We continue to see success on every aspect of the land, expansion and rise of our go-to-market movement. On the land side, our previously mentioned investments in simplifying the packaging and the integration process are paying off.

The first quarter was a record quarter for new customer bookings and the strongest net logo growth we’ve seen since our IPO. For land and extensions, net new plans added in the first quarter were more than four times higher than the first quarter of last year. And on the climb dimension, we saw 57 domains increase their Smartsheet investment by $100,000 or more in Q1, up 97% year-over-year, including an expansion of over $1 million. of dollars.

Additionally, we saw our first quarter churn improve to an all-time high of 4% and ended the quarter with over 10.5 million Smartsheet users. We now have 33 customers with an ARR greater than $1 million and three customers with over 125,000 Smartsheet users. Smartsheet continues to deliver best-in-class value because our collaboration model enables Smartsheet to achieve broad reach in a way that is both frictionless for the user and beneficial to the customer. »

The company also noted that employee attrition was low. In addition, the company met its sales hiring targets and welcomed its largest class of new salespeople in its history, while promoting high-performing reps with quotas to leadership roles – moves that , according to the company, will contribute to the sales momentum in FY23.

Growth investments led to a slight decline in operating margins, which fell by 4 points to -14% over the quarter:

Smartsheet Margins

Smartsheet Margins (Smartsheet Q1 Investor Presentation)

However, I will continue to point out that with gross margins of over 80% and revenue/billing growth of around 40%, Smartsheet still has incredible potential to scale down the road.

Key points to remember

Smartsheet is a much-overlooked software stock that has a well-recognized top-notch product, in addition to solid finances and a strong execution track record. Don’t miss the opportunity to buy this fantastic growth name at


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