piranka
Sumo Logic (NASDAQ:SUMO) is a high growth cloud software company. Its revenue is expected to grow at a CAGR of 15% in the long term (next five years) driven by its highly competitive observability and security solutions. These solutions offer customers reliability and empower them to grow with the help of technologically advanced cloud infrastructure environment. I believe long-term investors can buy the company’s shares around the current price to maximize their gain.
Sumo offers its customers a software-as-a-service analytics platform for reliable and secure cloud-native applications. The platform helps its customers ensure application reliability, and protection against modern security threats. The company’s multi-tenant cloud-native platform offers customers powerful and real-time machine data analytics solution.
Growth Drivers
Observability Solution
Sumo’s observability solution is its primary growth driver. The company offers its customers a strong solution for managing their application reliability. The company’s comprehensive observability solution for cloud applications combines cloud native log analytics, application performance management, or APM, and real user monitoring, or RUM, capabilities. The solution offers its customers cloud application infrastructure monitoring and troubleshooting capabilities, for which its customers can save costs, increase productivity, and generate revenue at an increasing rate. In addition, the solution helps its customers gain insight into their cloud infrastructure operations. I expect the company’s observability solution will help the company grow its revenue at a significant rate.
Security Solution
The company’s security solution is its another growth driver. The solution is aimed at helping developers, security analysts, and security operation centers in detecting threats, and automating security responses for their cloud applications. The company’s cloud infrastructure and application security analytics help its customers achieve best practices, which eventually results in improved productivity. As a result, the company’s revenue grows steadily in a sustainable manner.
Competition
The market in which Sumo operates is characterized by rapid changes in technology, and frequent introductions of improvements to existing service offerings. The company’s competitors include Splunk (SPLK), Elastic (ESTC), Datadog (DDOG), New Relic (NEWR), Amazon Web Services (AMZN), and Microsoft (MSFT). The company competes on the basis of quality of services offered, aftersales service, and price.
Sumo’s primary competitive advantage is that its continuous intelligence platform offers its customers reliability and security related to their cloud applications and cloud workloads. The platform is built on a cloud-native and multi-tenant microservices application that implements security-first principles, for which the company’s customers get benefitted in terms of expanded workflow and risk-free operations. The company’s another competitive advantage is that its machine data analytics program is capable of helping its customers to derive actionable insights, which eventually leads to win new customers and beat competitors. Both these competitive advantages help Sumo to expand revenue growth at a sustainable rate.
Second Quarter Fiscal 2023 Results
Sumo’s second quarter fiscal 2023 revenue came in at $74.1 million, an increase of 26% year-over-year. The company’s annual recurring revenue (“ARR”) arrived at $286.2 million, an increase of 25% year-over-year. The company’s non-GAAP net loss was $12.0 million, or $0.10 per share.
The company delivered overall good second quarter fiscal 2023 financial results. Top-line increased driven by wide adoption of the company’s software and services, and better operating efficiencies. Although the company was not able to make profit, I expect the company’s bottom-line will break into positive territory in the next three to five years driven by digital transformation, cloud migration and security modernization.
The company’s vision is making enterprise-grade customers’ digital experiences both reliable and secure. I feel the company’s cloud-native platform will help them achieve this and allow Sumo to drive its revenue growth significantly higher in the long term driven by its customers’ increasing reliance on the platform due to three things. First, the company ensures application reliability; second, the company offers protection against modern security threats; and third, the company’s tools to gain insights into cloud infrastructure is extremely helpful to customers. As a result of this, the company’s market share is growing steadily in the area of cloud application management.
Valuation
Sumo’s peer group companies include Splunk, Elastic, Datadog, New Relic and AvePoint (AVPT).
|
SUMO |
SPLK |
ESTC |
DDOG |
NEWR |
AVPT |
|
|
Price/Sales (TTM) |
3.36 |
4.27 |
5.15 |
15.28 |
4.47 |
3.87 |
|
EV/Sales (TTM) |
2.31 |
5.04 |
4.97 |
14.85 |
4.32 |
3.13 |
|
Price to Book (TTM) |
2.64 |
– |
13.05 |
18.36 |
12.20 |
3.77 |
(Data Source: Seeking Alpha)
Sumo is attractively valued compared to its peer group companies. Sumo has a balance sheet consisting of cash and equivalents of $91.7 million, and total debt of $2.7 million. The company is attractively valued because its potential is underestimated by the market. The company’s observability solution enjoys great demand in the market since its cloud application infrastructure monitoring and troubleshooting solutions offer customers tools to improve productivity. The company’s security solution offers customers competitive ways to detect threats. These are the reasons the company’s market share is growing in a sustainable way, which will lead to enhanced revenue growth for the company in the long term. I feel the company’s share price will increase significantly in the coming years driven by revenue growth.
Assuming the company’s revenue will grow at a CAGR of 15% in the next five years, I will find out the company’s long-term share price. The company’s trailing 12-month revenue is $288.00 million, and at a CAGR of 15% the company’s end-2027 revenue will be $579.30 million, or $4.83 per share. In the last one year, the company’s shares have traded between the price to sales multiples of 3.2x and 6.5x, and I expect in the next five years the company’s price to sales multiple will touch a high of around 5x driven by rising demand of the company’s advanced cloud solutions. Applying a price to sales multiple of 5x on the company’s end-2027 revenue per share, I get the company’s end-2027 share price as $24.15.
Risks
The company’s customers have variability in the revenue the company generates from them. This is because of the nature of their specific contractual arrangements or use cases with the company. The variability could result in lower demand for the company’s shares, which in turn could negatively affect the company’s share price in the long term.
The company’s sales strategy includes lead generation and offering free trials of its platform. The company spends a substantial amount of time and resources on this strategy. The strategy also includes reliance on its sales and marketing teams to promote and market its platform. If the strategy fails to generate sufficient sales opportunities, the company’s revenue growth may suffer in the long term.
Conclusion
Enterprises are increasingly relying on digital services for growing their businesses. Sumo plays a critical role in helping these enterprises to achieve their goals by providing them reliable and secure digital experience. I believe the company’s revenue will grow at a significant rate in the long term due to this reason. Long-term investors can buy the company’s shares around the current price.
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