Cornerstone OnDemand: Priced For A Rebound

Sep. 04, 2017 11:09 PM ETCornerstone OnDemand, Inc. (CSOD)
Gary Alexander profile picture
Gary Alexander
25.38K Followers

Summary

  • Cornerstone OnDemand shares have been under pressure recently after a disappointing earnings release in early August.
  • While growth has slowed down noticeably, the company is still landing new customers and profitable on an OCF basis.
  • Trading at just ~4x forward revenues, this is a rare bargain name in software.
  • Earnings disappointments are not new for Cornerstone - the stock slumped after Q3 earnings in November as well, but rebounded quickly following that.
  • Opportunist investors can take advantage of Cornerstone OnDemand's current valuation below historical averages to gain from a rebound.

Expectations are low for HCM software vendor Cornerstone OnDemand (NASDAQ:CSOD). After having missed two earnings in the past twelve months (3Q16 and 2Q17), investors aren't expecting great things from a company whose growth has decelerated to 10% in the most recent quarter.

At some point in every cloud company's life, the growth engine will begin to slow down - hopefully after the company has become profitable. And at that point, investors must start looking at the company through the value lens, not through the growth lens. And while Cornerstone isn't fully GAAP profitable, it is generating positive OCF, and its growth hasn't fully cranked down either - the company is still projecting 14-15% y/y growth for FY17.

Value is rare in the SaaS space, and value software stocks don't tend to stay cheap for long. While this company isn't a horse to bet on long term - this stock isn't going to double or triple on the back of successive beat and raise quarters - there are gains to be made in a short-term rebound.

ChartCSOD data by YCharts

It's evident from the 1-year chart above that Cornerstone is trading at the bottom of its trading range - while it should trade at a discount to its peers, 4x revenues is too low. A small rebound to 4.5x ($42) isn't a stretch, valuation-wise, and implies a ~20% return from current levels.

This article will refresh readers on Cornerstone OnDemand's business, discuss its position in the HCM software space, and review its valuation in the context of its recent results. Overall, Cornerstone, still generating small growth and growing its operating cash flow, makes for a perfect rebound play - and with expectations muted, a quarterly beat could send the stock into a new rally.

Cornerstone HCM Suite

Cornerstone's human capital management (HCM) software

This article was written by

Gary Alexander profile picture
25.38K Followers
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

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.

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