Sumo Logic Slowly Being Recognized

Summary

• Near-term catalyst is overly conservative revenue growth guidance by management for the 4th quarter. And no more than this guidance is currently priced in.
• Intermediate-term drivers are macro-related due to SUMO's exposure to SMB and mid-market customer segments.
• Long-term catalysts are tech-related. SUMO has better quality but relatively lower multiples to peers. They will increasingly exploit this as data flows increase emanating from greater 5G and IoT pervasiveness.
• Price at the time of writing is $37.50. Our 4-month target price is $52 and 12-month target price is $60.

About this Article

The space in which Sumo Logic (SUMO) operates can be confusing to non-technical investors, so in this report we shall break it down into layman terms to make sure all readers fully understand the investment potential.

Executive Summary

Since its IPO in September 2020, SUMO has largely been under the radar yet it is a pioneer in an area of big data and analytics called Continuous Intelligence that is going to play a critical role in an increasingly hyperconnected world. SUMO’s large mid-market base has made it vulnerable during the pandemic as these more price-sensitive customers prioritize costs, resulting in higher churn. As a consequence, YoY revenue growth has decelerated from 51% in 1Q21 to 31% and 28% in 2Q21 and 3Q21. Management have offered guidance of 18% for 4Q21, which the market appears to have priced in given the 18x EV/S LTM at time of writing. We anticipate there are a few factors to deliver substantial upside, in the short and long-term. Firstly, we believe SUMO will comfortably surpass the growth guidance of 18% in 4Q21. Despite the drop in growth to 28% in 3Q21, growth in Remaining Performance Obligations (RPO) was 51%, which is supportive for future revenue and as it was only casually mentioned by management in the 3Q21 earnings call, we surmise that this has been largely overlooked by the market. Further out into 2021 we expect the intra-vaccination environments to gradually improve economic conditions which will help SUMO win back SMB and mid-market customers. Also, the shift in sales focus to larger enterprise clientele will help reaccelerate growth, boost contribution margins, improve the cash flow situation and in turn support the valuation. On a longer horizon, once 5G and IoT begin to ramp up data flow, continuous intelligence platforms like SUMO’s will be crucial for businesses to protect assets, make optimal decisions, drive better customer experiences, and eliminate intelligence gaps. At this stage of our digitalization, organizations of all sizes will begin to take note of the ROI

Analyst’s Disclosure:I am/we are long SUMO. 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.