It hasn't been since 2019 when I last covered Smartsheet Inc. (NYSE:SMAR), which makes an update on the investment thesis long overdue. Fast forwarding nearly five years in time, Smartsheet has seen its shares trade flat, while the business has more than tripled in size since, although growth on a per-share basis has been slower amidst dilution incurred from losses and stock-based compensation expenses.
While sales multiples have come down and real operating leverage has been displayed upon in recent times, Smartsheet continues to post realistic losses here, making me cautious, also in the light of AI having a potential disruptive impact on (parts) of its business.
About Smartsheet
Smartsheet is a so-called enterprise work management platform, empowering companies of all sizes to scale and deliver value amidst evolving business requirements. The company creates smart solutions for businesses through its collaboration software, used by many companies. The idea is that software teams can work together, even from different locations, with information being accessible from multiple devices, key already in a pre-pandemic environment.
The software saw real traction, as it seemed like a suitable solution for so-called unstructured work, including presentations, communications, ideas, all things which cannot be easily be captured in ERP and database solutions, although the emergence of AI, of course, might create a (partial) competitor.
The company went public in 2018 at $15 per share, at the time generating billings exceeding $200 million. With about 100 million shares outstanding just after the offering, the company commanded a $2 billion valuation, which resulted in a high single digit sales multiple, which looked relatively compelling amidst >50% top-line sales growth. However, the company was posting substantial losses, to the tune of 35% of sales.
Forwarding to the fall of 2019, shares were trading in the $40s, granting the company a $4.5 billion enterprise valuation, pushing up the sales and billings multiple to about 13 times, as losses remained very real. All this made it very hard for me to get upbeat on the shares, withholding me from getting involved.
What Now?
Fast forwarding nearly five years in time, investors have seen lackluster returns, in fact, shares are down modestly to $39 per share. This came after shares traded at highs around the $80 mark during 2021, although that shares briefly traded in the $20s as well during the technology rout of 2022.
This seems hard to match with the underlying results. In March, Smartsheet reported a 25% increase in full-year sales to $958 million, the vast majority of which are subscription revenues. Since the outset of the pandemic, the company has been posting GAAP operating losses exceeding $100 million per annum, but some positive trends in this area were seen in the fiscal 2024.
GAAP operating losses narrowed from $221 million in fiscal 2023 to $120 million in 2024. While the company reported adjusted earnings, that is only after a huge $208 million stock-based compensation expenses being adjusted for, and to a lesser extent a near $11 million amortization charge.
Narrowing losses had to do with greater discipline across the technology sector at large. While fourth quarter sales growth of 21% was less pronounced than the year at large, it were GAAP operating losses, which narrowed to just $16 million in the final quarter.
With 136 million shares now trading at $39, the company commands a $5.3 billion equity valuation, a number which includes a $628 million net cash position, for a $4.7 billion enterprise valuation. This values the business at just over 4 times sales now, while topline growth is still decent and margin improvements are seen.
In fact, the company guided for fiscal 2025 sales to advance another 16-17% to $1.113-$1.118 billion, with non-GAAP operating income seen at a midpoint of $140 million. That does not say too much, as this metric came in at $101 million in 2023, and still yielded huge economic losses, and frankly the same can be expected for 2024.
What Now?
The reality is that Smartsheet seems to be a more established software business here, with billing and annual recurring revenues exceeding the billion mark. Given the fact that the company offers smart measurement solutions to clients, it has great information on the business as well. The company has nearly 20,000 customers which each pay over $5k per annum, nearly 4,000 customers who pay over $50k, and nearly 2,000 customers paying over $100k each.
The reality is that the company sees slower growth and will again post substantial economic losses in the current year, hardly being a promising set-up here. These concerns, notably slower SMB adoption, could not be offset by a $150 million share buyback program, which has recently been announced.
The greater concerns relate to the lack of economic profits here, but moreover the competitive nature of the business. Besides the losses, the company sees much slower growth here, which is concerning, attributed to budget scrutiny among many customers here. On the other hand, I fear long-term concerns around AI as well, which could create a competitive threat to the business, even though the company is actually offering some AI features here as well.
Given all this, I am performing a balancing act. While the long-term Smartsheet Inc. valuation here looks a lot more reasonable, amidst much lower sales multiples, I fear the slower top-line sales growth, but moreover lack of realistic earnings. All of this makes me cautious and patient to buy the dip. Quite frankly, I am not convinced that Smartsheet is the smartest choice here.
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