- Shares of customer experience software company Medallia have fallen more than 35% from all-time highs.
- Losses accelerated after the February tech rout as Medallia posted Q4 earnings results, despite beating Wall Street's expectations in the quarter.
- Investors took issue with the company's expectations of deceleration in Q1, despite a full-year FY22 outlook that topped consensus expectations.
- Medallia remains a fairly unique software play with very high-profile comps like Qualtrics, and has fallen to attractive valuations at ~7.5x current-year revenue.
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The tech sector has been a minefield over the past few weeks, and in the rubble there are a few stocks that were already cheap to begin with pre-February that have become even more so following the recent correction.
Medallia (NYSE:MDLA) is one of those names. A relatively little-known software company that focuses on customer experience management (collecting and analyzing customer and user data on behalf of companies like banks, media companies and automakers), Medallia stock has been inexplicably hit over the past month despite stable fundamentals and a path for further growth in 2021.
To me, this stock is flashing buy signals.
The Medallia story is still going strong
Medallia is a big beneficiary of the "data-driven decision making trend." These days, C-suites are wanting to take actions based on what data they can capture from their customers. Platforms like Medallia help businesses log customer touchpoints ranging from email, customer support incidents, and web activity, and translate that data into actionable insights for company leaders. Perhaps most impressive of all about Medallia is the diversity of its go-to-market engine: it is resold by top-notch consulting firms like Bain as well as being an integrated application on platforms like Salesforce (CRM) and Adobe (ADBE).
It also has garnered significant mindshare in its space and won high rankings from Gartner, the noted software industry analyst and researcher. Gartner named Medallia, alongside its much better-known rival Qualtrics (XM) which just completed a highly sought-after spinout from SAP (SAP), as the two Leaders in its annual Magic Quadrant for the "Voice of the Customer" space:
As more and more companies turn their decision-making systems away from executive judgment and more on rigorous data collection and analysis, platforms like Medallia will continue to lead the way and gain more traction. The company has already scored some of the largest companies across multiple industry verticals as customers, including Wells Fargo (WFC) and Bank of America (BAC) in banking, Delta Airlines (DAL) and Toyota Motors (TM) in transportation, Airbnb (ABNB) and Marriott (MAR) in hospitality, CVS (CVS) and Pfizer (PFE) in healthcare, and Samsung, HP (HPQ) and SoftBank in technology.
Valuation still modest despite strengths
Especially after Medallia's recent correction, the stock stands at a very modest valuation relative to other similarly growing (~20% y/y growth) software peers. At current share prices near $30, Medallia trades at a market cap of $4.49 billion and after netting off the $682.4 million of cash and $48.1 million of debt on its most recent balance sheet, an enterprise value of $4.26 billion.
Versus Medallia's FY22 (covering most of calendar year 2021) revenue guidance of $563-$567 million (+18-19% y/y), the stock trades at just 7.5x EV/FY22 revenue - despite most other ~20% growth peers trading at double-digit multiples even after the recent correction. We note as well that Medallia's 18-19% growth expectations for the year topped Wall Street's $554.8 million consensus, which would have represented only 16% y/y growth.
The only reason Medallia shares sank post-Q4 was that its Q1 revenue guidance implied deceleration to 12-14% y/y growth - which I wouldn't read too much into, given the fact that Medallia tends to set a relatively low bar for itself to cross. The acceleration that Medallia is baking in for the latter part of FY22 owes partially to its acquisition of Decibel, a digital experience analytics company which Medallia acquired very recently for $160 million in cash, which will begin to be consolidated into Medallia's results partially in the first quarter and contribute an expected ~$8 million (~1.4% of total) revenue for FY22.
Let's now cover Medallia's latest fourth-quarter results in greater detail. The Q4 earnings summary is shown in the table below:
Medallia grew its revenue by 16% y/y to $128.0 million in the quarter, beating Wall Street's expectations of $124.6 million (+13% y/y) by a healthy three-point margin. Subscription revenue alone saw much stronger 20% y/y growth to $103.8 million, representing 81% of Medallia's overall revenue - up three points from a 78% subscription mix in the year-ago quarter. That's another reason to like Medallia - as the company has deepened its go-to-market and reseller/ISV relationships, it has offloaded more of the lower-margin services revenue to its partners, and the remaining high concentration of subscription revenue gives the company a huge degree of revenue visibility for future periods.
The company ended 2021 with 1070+ enterprise customers, which represents 42% y/y growth in the company's customer base (from 757 at the end of last year). In the fourth quarter alone, the company completed 172 go-lives. Note that despite the pandemic - a period in which new business has been more difficult for software companies to drum up - customer growth actually accelerated from 39% y/y growth in FY20.
One area in which Medallia is gaining even greater traction is with public sector engagements. These government deals can sometimes represent some of the largest opportunities for software vendors. Per CEO Leslie Stretch's prepared remarks on the Q4 earnings call:
Turning to our new wins during the quarter. Just over a year ago, we announced our investment in public sector to position us for success in federal, state and local government. Our investments are beginning to pay off. Medallia is emerging as the system that keeps all other systems citizen aware. New U.S. federal government wins in the quarter include agencies such as the Department of Education, the Federal Reserve, Department of Agriculture, and the U.S. Postal Service added employee experience capabilities in Q4 and are now leveraging Medallia for both customer and employee engagement on one platform.
New state, local government and education logos in the quarter include: New York, New Jersey Port Authority, the city of Edmonton, the state of Nebraska, the state of Indiana, and Ohio State University is leveraging privacy to our ideas platform to accelerate collaboration with students to reimagine the campus experience post-COVID-19."
Beyond the U.S., Medallia also noted that it is starting to win traction with public sector agencies in the U.S. as well.
Another bonus for Medallia: the company is breakeven on a pro forma operating profits basis, which is a rare achievement for software companies of Medallia's relatively small scale.
Source: Medallia Q4 earnings release
As can be seen above, the company has broken even in both the fourth quarter of FY21 and in the prior FY20; while over FY21 as a whole, Medallia's pro forma operating margins have gained three points to +2%, versus -1% in the year-ago period. This is a great example of a company that balances sturdy growth in the ~20% range while also maintaining consistent profitability.
Risks and key takeaways
All of this being said, there are several risks that are present on the bear side of the camp that is currently dragging the stock down. The prime risk is that of continued pandemic impact: a good chunk of Medallia's customer base lie in consumer-facing companies that have been hit by COVID-19 restrictions. A non-exhaustive list of Medallia clients that have been disproportionately impacted by the pandemic include names like Hilton (HLT), Marriott, Gap (GPS), Petco, Macys (M), Delta Airlines (DAL), and others. A failure to recover in these industries may mean slower bookings for Medallia - and also hence why the company's guidance for Q1 is on the conservative side.
Another risk is competition. As previously mentioned, Medallia is up against better-known competitors like Qualtrics and to a lesser extent, SurveyMonkey (SVMK). While the CX space, in my view, is broad enough for multiple key vendors (in its IPO, Medallia stated its TAM was $68 billion), running into these competitors in bakeoffs for the same clients may impact Medallia's rate of closing deals.
That being said, Medallia looks freshly appealing at ~7.5x forward revenue, and I believe these risks are baked in. This is a company that rides significant secular tailwinds toward data-driven decision making and has already gotten traction with some of the largest corporate clients in the U.S., while also beginning to extend its reach into public sector/government agencies. Stay long here and buy the dip.
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This article was written by
Analyst’s Disclosure: I am/we are long MDLA. 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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