Mulesoft (NYSE:MULE) has gone public in an IPO which was extremely well-received by the market. The market is open again to rapidly growing software players, notably if margins are sky-high, growth is impressive high, and they aid organizations to speed up developments in this rapidly evolving and complex IT world.
This is exactly what Mulesoft does and the company looks very promising by all means. That said the 60% run higher from the midpoint of the preliminary offering range has pushed up the valuation towards $3 billion. This makes that the company still has a lot to prove to sustain this valuation over time, making me cautious for now.
Who Is Mulesoft?
Mulesoft helps organizations to change faster and innovate quicker in a world which is seeing rapid growth in terms of applications, devices and data. Traditional IT departments are under a lot of pressure to handle this growth in a good manner. As they are often challenged in this task, they are a limiting factor for the pace of innovation and corporate change.
To help these IT departments, Mulesoft has developed the Anypoint Platform which went live in 2014. This platform connects all these applications, devices and data, as IT departments can simply 'plug' the IT assets in through the usage of APIs. Before this application, connecting these assets was literally 'donkey work', hence the name of the company.
This solution is in demand with companies. Since being founded in 2006, the company has grown to serve over a 1,000 customers in 60 countries. Some 30 of these businesses fork over at least a million to Mulesoft each year.
The Offering & Valuation
The company sold 13 million shares for $17 per share, raising gross proceeds of $221 million. Demand for the offering was very strong, with the preliminary offering range being determined at $14-$16 per share. There will be 126 million shares outstanding following the offering, and these have risen by a spectacular 45% on their opening day towards $24.75 per share.
That implies the that market has quickly awarded the company a $3.1 billion market value. With pro-forma net cash holdings standing around $300 million, the enterprise valuation is set around $2.8 billion.
So what kind of financial performance is Mulesoft showing for this valuation? The company is showing rapid growth with sales advancing by 91% in 2015 to $110.2 million, and growing by another 70% to $187.7 million last year. These revenue streams can be very lucrative with gross margins come in at 74%. In 'traditional' fashion, this emerging software play is still losing money, some $48.3 million on an operating basis in 2016. This means that GAAP operating losses came in at 25% of sales, which is a major improvement from the minus 58% margin reported in 2015.
The good things is that IPO filings show quarterly numbers as well. For the final quarter of 2016 revenue growth came in at 62%, with sales hitting a run rate of $220 million. While growth has slowed down a bit it remains quite impressive, as GAAP operating losses narrowed to 23% of sales.
Strong growth in 2016 was driven a growing customer base as the total number of customers rose by nearly 28% towards 1,071. The real kicker came from those customers being more active, as they ordered more software solutions. Average revenues per user rose by 36% to $143k per year.
Mulesoft has seen a big run following its IPO, as the +60% run higher from the midpoint of the preliminary offering range resulted in a $2.8 billion valuation. This is equivalent to 12-13 times current annualized revenues, although it should be said that these sales are still growing by 60% and losses are coming down. The cash infusion from the IPO makes that these losses are not really a concern at this point in time, as the $300 million cash position acts as a real buffer.
These sales multiples are not outrageous compared to some other 'cloud' names, yet it is very hard to pick a winner in this industry in which conditions change rapidly and competition is fierce. Mulesoft lists IBM (NYSE:IBM) and Oracle (OTC:OCLCF) as traditional big competitors, but also mentions Apigee (NASDAQ:APIC) which was acquired by Alphabet (NASDAQ:GOOG) in a $625 million deal last year. That deal took place at a sales multiple of roughly 6 times, which is just half that of Mulesoft. It should be said that Apigee was much smaller, its sales were growing by just +30% per year and that losses were bigger.
All in all shares trade in a neutral zone for me. The sales multiples do not look out of whack with many other cloud or SaaS players which have been able to sustain and grow these valuation multiples, despite posting losses as well. While growth has slowed down a bit, the +60% growth run rate remain impressive as the sky high gross margins allow for rapid leveraging of operating margins if expenses come under greater control.
This makes a short case potentially dangerous, although the market has been quite bullish already, as seen in the momentum run higher following the IPO. On the other hand, there is no reason to blindly buy into the long term thesis as well, or you have to believe that Anypoint has the competitive power to become the industry standard. This would assume that the business can fence off competition successfully, which is a very bold prediction, and not one I am would be willing to make.
As such Mulesoft remains in the neutral zone for me, although I will continue to watch the developments from here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.