Ping Identity - Stock And Valuation Near Bottom, Time To Buy

Summary

• Following solid F2Q21 results, we are buying more shares of Ping at the current levels. The company beat consensus revenue, EPS, ARR, and free cash flow estimates.
• Ping has been impacted by the pandemic more than other companies in our coverage universe. The company expects business to recover quickly as the pandemic comes to an end.
• With the pandemic end looming, many enterprises, particularly in the affected industries of travel and hospitality, are building out their identity security ahead of potential business improvement.
• The stock is trading slightly above 52-week lows of around $20 and is still 40% below its 52-week highs of about $38, making the risk/reward favorable to investors.
• The company has products, growth drivers, compelling valuation, and potential multiple expansion to increase the stock price. Therefore, we urge investors to buy the stock here.

Blue Planet Studio/iStock via Getty Images

Following Ping Identity’s (NYSE:PING) blowout quarter, we reiterate our buy rating on the stock. Over the last several quarters, Ping has underperformed both its peers and the broad market as the Covid Pandemic disproportionately impacted its enterprise customers. This underperformance could be a thing of the past as many of Ping’s traditional customers began re-engaging with it in a full-on mode. We believe the worst is behind the company, and now we look forward to growth returning for the company. The company reported F2Q21 results ahead of estimates, and the company sounded cautiously optimistic that the business is returning to normal. Ping remains one of our favorite mid-cap technology stocks with a robust identity management platform in the industry. Some of the most sophisticated enterprises with their complex security and identity requirements rely on Ping. Ping’s products can be deployed on-prem, hybrid cloud, and native cloud architectures. We believe Ping is a compelling alternative to Okta (OKTA) with an easy valuation, a marquee customer base, and improving business. Therefore, we would be buying shares at the current level.

Summary of F2Q21 results

Ping reported F2Q21 results beating all the key metrics the company traditionally guides – ARR, Revenue, and unlevered Free Cash Flow. Ping reported F2Q21 revenue of $78.9 million, up 34% Y/Y, versus consensus revenue estimate of $66.1 million. ARR grew 19% to $279.6 million. The dollar-based net retention rate increased two percentage points Q/Q to 111%, and the company generated $15.0 million in unlevered FCF. The company provided additional disclosures into the various components of its revenue line item. Subscription revenue was $73.2 million or 93% of Total Revenue. Within subscription revenue, SaaS revenue was $13.4 million and grew 51% Y/Y. The company believes ARR is the best metric to evaluate Ping’s business performance, given the deployment mix and contract duration. Ping disclosed the various components of revenue for the first time, as the following chart shows.

Source: TechStockPros & Ping Presentation

Ping reported a gross margin of 80.5% and an operating margin of 15.6%. EPS was $0.12 versus the consensus of $0.04. Higher than expected revenue and gross margin and lower than expected operating expenses contributed to EPS beat. The company also guided F3Q revenue ahead of estimates. F3Q revenue is expected to be in the $65-70 million range, higher than the prior consensus revenue estimate of $65 million. The following chart illustrates our estimates versus reported results.

Given our confidence Ping is likely to beat estimates again when it reports results in November, our estimates are higher than consensus.

Valuation

We use EV/Sales as our primary valuation metric. Many companies we cover usually have high revenue growth rates but do not have sufficient profitability and cash flows. Many companies are also in transition from perpetual revenue to subscription/SaaS revenue models. To make comparisons meaningful and account for varying amounts of cash and debt, we use Enterprise Value to sales as the primary valuation metric. Also, one of the primary metrics used to evaluate takeout prices remains EV/Sales. In a takeout scenario, EV/sales valuation makes it is easier to compare with historical acquisition multiples. Ping is currently trading at 6.0x EV/C2022 sales, well below the peer group average of 14.0x. Now, Ping is growing slower than the peer group. Even accounting for the differences in growth rates, we believe Ping is cheap. On a growth-adjusted basis, Ping is trading at 0.40 versus the peer group average of 0.62. Among all the Identity-related stocks, PING remains amongst the cheapest, along with SailPoint (SAIL). The following chart illustrates the valuation of the security peer group.

What to do with the shares

Ping has underperformed both S&P and Nasdaq indices by a wide margin. Over the last 12 months, Ping is down almost 29%, while Nasdaq is up nearly 36% and S&P is up 34%. YTD, PING is down almost 11%, while S&P is up 17% and Nasdaq index is up 15%. The following charts illustrate Ping’s underperformance relative to the market.

With the pandemic end looming this year, many of Ping’s customers are looking to invest in Identity offerings. We expect Ping’s Revenue to accelerate from the current levels, and we expect the company to beat estimates for F3Q. Given the shares of Ping are cheap and the estimates are conservative, we would be buying shares now. We expect the company to report solid 3Q results when it reports in October. We believe the company is cautious in its guidance, and we expect repeat beat-and-raise quarter. We expect 2021 to be a better year for the shares, as the company now has multiple products to address hybrid cloud architectures. We think Ping’s shares have bottomed at around $20, and at current levels, we believe the risk/reward is favorable to investors. Given our confidence in the story and longer-term prospects, we would be buying more shares now. We expect shares to appreciate rapidly from the current levels, and we would not be surprised to see the shares past the $30 mark with few weeks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PING either through stock ownership, options, or other derivatives. 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.