Medallia (NYSE:MDLA) develops software for companies primarily for managing customer experience. It is a high-growth company and I expect that in the next five years its revenue will grow at least at a CAGR of mid-teens. Considering its growth prospects it can be said that Medallia’s valuation is attractive. Investors with a long term time horizon can buy the company’s shares around the current price utilizing the dip in the share price. I am bullish on the company.
Medallia is an experience management company. The company’s technology solutions help its customers generate better customer experience compered to its peers. The name of the company’s experience management platform is Medallia Experience Cloud. The platform is built on open architecture. The platform depends on artificial intelligence (AI) and machine learning to analyze customer data.
Medallia’s primary growth driver is Medallia Experience Cloud, which is the company’s experience management platform which captures signals from its customers’ data (the platform is offered through a SaaS business model, and therefore it is also called the SaaS platform). Then using analytics and AI, the signals are filtered and key themes for customers’ businesses are identified and offered to them. The company has multiple connectors, such as Adobe (ADBE), Salesforce (CRM) and ServiceNow (NOW), which makes it easy to integrate signals with external applications and APIs. I believe the SaaS platform has a bright future in terms of its future market share. This is because companies of all sizes can use the SaaS platform to receive personalized and actionable insights, and companies new to Medallia will continue to become its customers. Since extracting insights from big data is a high growth business, the SaaS platform has huge growth prospects. According to a report:
Customer Experience Management Market was valued at USD 6.62 Billion in 2019 and is projected to reach USD 17.5 Billion by 2027, growing at a CAGR of 16.8% from 2020 to 2027.
The customer experience management market is growing at an impressive rate (as mentioned in the report), and Medallia will also grow closer to this rate.
Medallia’s product suites are also its growth drivers. The product suites are sold standalone to key buyers to support specific use cases. The product suites leverage Medallia’s SaaS platform Medallia Experience Cloud. Among the product suites, Crowdicity and Zingle have good growth prospects.
Crowdicity is Medallia’s crowdsourcing platform which has been developed to support the company’s SaaS platform Medallia Experience Cloud. Crowdicity helps companies involve in ideation and collaboration, which facilities are used by modern businesses to improve customer and employee experiences. Crowdicity indirectly drives growth of the company’s experience management platform. The product ensures customer and employee satisfaction, and therefore it is an important growth driver of the company.
Zingle is integrated with Medallia’s personalized service platform engagement messaging. Zingle offers seamless delivery of products and services which are purchased by customers through the engagement messaging platform. Zingle uses AI to automate conversation between the company and its customers, reduce delivery time, and create upselling and cross-selling opportunities. Since Zingle helps customers smoothly purchase products and services, revenue from it will grow in future.
Medallia’s competitors include Qualtrics International (XM), InMoment, Confirmit, Verint Systems (VRNT), Concentrix (CNXC), NICE Satmetrix, SMG, and Alchemer. Most of Medallia’s competitors are privately held companies. Medallia leads the experience management market. In order to continue to hold the leadership position, it will expand the scope of its experience management platform and invest in sales and marketing activities (the company said in its annual report). This will help the company face competition more effectively.
Medallia’s primary competitive advantage is that its SaaS platform addresses experience management requirements of enterprise-grade customers, to whom the company can charge higher prices (Medallia has over 1,070 enterprise customers and nearly 50% of its enterprise customers have over 1,000 users). In this way the company can generate more revenue and in turn face competition successfully. The company’s another competitive advantage is that it generates positive customer experience by selling its products and services, which works in favor of its revenue growth. In today’s competitive business environment, technology companies not only compete on product performance, they also compete on customer experience. Medallia is successful in producing better customer experience.
Medallia’s fourth quarter fiscal 2021 total revenue came in at $128 million, up 16% from the year-ago period. The company’s fourth quarter subscription revenue came in at $103.8 million, up 20% from the year-ago period. The company’s fourth quarter net loss was $48.8 million, or $(0.32) per share, compared to a net loss of $31.9 million, or $(0.25) per share, in the year-ago period.
Medallia’s fourth quarter total revenue and subscription revenue increased significantly year-over-year. The company is continuing to reinvest its profit in global sales coverage and product development and therefore it is making losses. Considering all these factors it can be said the company delivered strong fourth quarter fiscal 2021 results.
Medallia recently acquired Decibel, which is a new technology that covers the domain, the unsolicited digital experience. Decibel has the capability to deliver better cross-sell and upsell, which ensures more revenue growth for the company.
Medallia recently announced product wins from more than 16 customers, which will help it grow revenue in the forthcoming quarters. The company has a robust pipeline consisting of innovative products and it is growing. The pipeline supports the company’s expanded revenue growth forecast for fiscal 2022. The company’s top priority is accelerating subscription revenue growth.
The company’s most relevant competitors are Qualtrics International (XM), Verint Systems (VRNT), Concentrix (CNXC), Everbridge (EVBG), and Workiva (WK). Medallia’s trailing 12-month price to sales multiple is 7.58x, compared to Qualtrics International’s 18.03x, Verint Systems’ 2.38x, Concentrix’s 1.63x, Everbridge’s 14.07x, and Workiva’s 11.80x. Medallia’s trailing 12-month price to book value is 7.63x, compared to Verint Systems’ 2.40x, Concentrix’s 3.32x, Everbridge’s 15.49x, and Workiva’s 63.63x (Qualtrics International’s price to book value is not available). (Source: Seeking Alpha)
The average price to sales multiple of Medallia and its competitors is 9.25x, and the average price to book value of Medallia and its competitors is 18.50x. Clearly, Medallia is attractively valued compared to its competitors. Medallia is a debt-free company. Its total cash on balance sheet is $682.39 million and total debt is $516.68 million. I am bullish on the company not only because it is attractively valued, but also because its SaaS experience management platform leads the experience management industry. Plus, Medallia is investing large sum of money to ensure further growth of the experience management platform, so that it can continue to hold the leadership position. The company is aggressively developing new technology and also acquiring new technology if opportunity exists (such as Decibel), which are making the experience management platform stronger. The company has signed many new partners in fourth quarter fiscal 2021, such as Live Person, G2, Red Box, and Chat Meter. IBM has been signed as the new go-to-market partner of the company. These new partners will create new businesses for the company.
Medallia is a high-growth company. In the last three years the company’s revenue has grown at a CAGR of 22.25%. I expect revenue will continue to grow at least at a CAGR of mid-teens in the next five years because of the company’s activities to grow revenue, as mentioned in the above paragraphs. The company’s trailing 12-month revenue was $477.2 million. At a CAGR of 16%, its mid-2026 revenue will be $1,002 million, or $6.38 per share. In the last three years Medallia’s shares have traded between the price to sales multiples of 5x and 14x. Applying a price to sales multiple of 14x on Medallia’s mid-2026 revenue per share, I get $89.32 as the company’s mid-2026 share price.
Medallia is a loss-making company. As of January 31, 2021, the company had an accumulated deficit of approximately $629.6 million. The company expects its losses will continue to occur as the company wants to reinvest profits towards growing its business. This could prevent the company’s stock to rise significantly in the long term.
The company generates most of its revenue from subscriptions to its experience management platform. If the platform fails to create sufficient demand, and if it fails to adapt to changing market dynamics, the company’s revenue growth and results of operations could be negatively impacted.
Medallia’s SaaS platform is one of the most diversified and most comprehensive experience management platforms available in the market. The demand for the platform is growing and therefore the company's revenue is also growing. I expect revenue will continue to grow in the next few years due to the company’s several initiatives to grow it. The company’s stock is a long-term buy around the current price level.
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