As investors watch one tech IPO after another soar out the gate, new challenger Smartsheet Inc. is growing more ambitious as it prepares for its Thursday IPO. According to NASDAQ, Smartsheet raised the IPO price from $12 to $14 compared to the earlier price range from $10 to $12. At $14, Smartsheet would command a fully diluted market value of $1.55 billion, which is impressive considering that TechCrunch reported that its valuation was $852 million last May.
Smartsheet has grown more rapidly than perhaps any other tech IPO this year and is in a growing sector, but it faces intense competition and investors may be worried about its lack of profitability. Nevertheless, I believe that this is a company which could perform well immediately, though investors may want to look at another of the many good tech options out there.
The Future of Work
New technologies mean that today’s workplace is more complicated than ever, and yet many of us, including Vanguard tax resolutions, use the same tools that we did a decade ago in email, spreadsheets, and Microsoft Office. IT professionals can craft new technology solutions, but the vast majority of knowledge workers remain forced to work with limited tools.
Smartsheet argues that its subscription software service lets business customize workflow to fit their needs and become more efficient overall. In its SEC report, it states that they “have over 92,000 customers, including more than 74,000 domain-based customers, 90 companies in the Fortune 100, and two-thirds of the companies in the Fortune 500.”
There are some good things here. First, Smartsheet is a subscription-based business which means consistent revenue. The enterprise collaboration market which Smartsheet is a part of has plenty of room to expand precisely because companies are looking for new software to cope with new technologies.
On the other hand, the growth of this market means increased competition from companies such as Atlassian (NASDAQ:TEAM) who also offer new solutions to old workplace problems. But Atlassian is currently at a premium valuation, which likely contributed to its recent fall in share value despite a recent good earnings report. Smartsheet does not have this problem, especially given its high growth.
The big selling point for Smartsheet is its impressive growth rate. Total revenue increased from $40 million in the 12 months ending January 31, 2016 to $67 million and $111 million in the next two years. Smartsheet’s subscription revenue, which is the most important part of its business due to its high margins, increased from $39 million to $100 million. Revenue obviously ballooned, but the rate of growth remained consistently around an impressive 60 percent over this timeframe.
The downside is that while Smartsheet’s revenues have risen, so have its net losses. It lost $14 million in 2016, which rose to $49 million in 2018. Net loss per share increased from $1.03 to $2.94, and Smartsheet’s expenditures rose drastically in every area. Like most tech IPOs, Smartsheet declared that they may never achieve profitability.
The important thing to note about those net losses is that Smartsheet was not severely impacted thanks to earlier funding rounds. Despite the high net losses, Smartsheet’s cash flow increased by $36 million in 2018, and they currently have $58 million on hand. Combine that with the fact that they can raise up to $187.35 million in this IPO, and Smartsheet is free to pursue an aggressive growth strategy for at least the next few years. While Smartsheet will have to show a path towards profitability eventually, I like their current aggressive growth strategy.
Look for Stability
I expect Smartsheet to have a strong Thursday debut like most tech IPOs in 2018, and there is a lot to like about this company and its aggressive approach towards growth. At $14, this company is certainly a solid buy.
The obvious catch, however, is that most investors will not be able to get Smartsheet at $14. I expect Smartsheet to storm out of the gate like most tech IPOs have this year, and the stock could easily hit $20 in the initial IPO hype. Investors are probably better off waiting for the hype to wear off, especially since it probably will not last long as everyone’s eyes turn towards the next tech IPO. Smartsheet’s price will fall then, at which point it could be a value buy.
Regardless of what happens on Thursday, Smartsheet is a solid company which investors should strongly consider buying. It is just that now may not be the best time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.