Smartsheet (NYSE: SMAR) is a smart buy because of its growth, operational quality, cash flow, and capital return. That’s why private equity firms are in talks to buy it; they see deep value in the business and its stock. The takeaway is that Smartsheet will either get taken over at a premium to today’s prices or won’t. If it does, investors stand to make a quick 10%, and the gains will be greater if it doesn't.
What is Smartsheet? It is a cloud-based SaaS firm focused on workflow and project management. Clients include nearly 85% of the Fortune 500 and 90% of the Fortune 100, statistics which prove its utility for business. Firms looking to take over the business include a partnership between Vista Equity and Blackstone (NYSE: BX), which are reported to be nearing finalization on an agreement worth $8 billion. If completed, it would be among the largest takeovers of the year. The $8 billion target price works out to about $56 per share or a nearly 10% premium to the market cap, with shares trading near $52.50.
Smartsheet Is Growing and Monetizes AI Today
Smartsheet reported a solid Q2 and gave guidance indicating strengths will continue through the year’s end. Revenue growth is slowing, but the $276.6 reported is up 17% compared to last year and outpaced the consensus by 70 basis points on increasing client count and deepening service penetration. Subscription revenue, the company’s core business, is up 19%, offset by an 8% decline in Professional Services.
The critical details concerning revenue are the 17% increase in ARR and 113% net retention rate, which point to sustained growth at current levels as the client count grows and existing clients lean into expanded services. Regarding the client count, the number of clients contributing more than $100K in ARR grew by 23%, followed by a 17% increase in clients contributing more than $500K in ARR and a 6% increase in small businesses.
The margin news is the best in the report, with GAAP and adjusted margin improving at all levels. Adjusted margin, which matters regarding cash flow, improved by 800 basis points to 16%, doubling last year’s results. The net result is a GAAP profit of $0.06 compared to last year’s losses, and adjusted EPS is up nearly 3x to $0.44, beating the consensus by 5000 basis points or 50% better-than-expected. The cash flow and FCF set records with FCF of $57.2 million, or 21% of the revenue, and are expected to remain strong for the foreseeable future.
Smartsheet Gives Cautious Guidance, Shares Rise
The only bad news in Smartsheet’s report is the guidance, and even that is not bad, only in alignment with the robust analysts' expectations. The company expects sequential and YoY revenue growth, with YoY growth slowing to a pace of 15% to 16%, a low bar to beat. The earnings are expected to run near $1.375 for the year, which is also a low bar to beat, given the momentum in revenue growth and widening margin and a primary reason analysts lifted their price targets for the stock.
MarketBeat.com tracked 10 analyst revisions the first day after the release, with 80% raising their price targets and the two outliers reiterating targets above the consensus. The 10 lead to the high-end range, or another 4% to 5% upside, in addition to the 5% implied by the consensus. A move to consensus would set a multi-year high and break the market out of its consolidation range, setting it up to continue higher in 2024.
The technical action is suggestive. The market is moving up from the bottom of a range and is on track to break out of the range and set new highs. The current highs are providing resistance but may be broken soon. If so, the technical targets are the magnitude of the trading range added to the breakout point or a gain of $26 at the low end. The high-end target is the range magnitude as a percentage of the price or 100% from low to high. Adding that to the breakout point puts this stock above $100.
