Software solutions provider Smartsheet Inc. (SMAR) in Bellevue, Wash., is known for developing and marketing the Smartsheet application. It is better-than-expected bookings performance in its last reported quarter, and a record number of large deals, have helped the enterprise platform achieve double-digit revenue growth. But SMAR’s stock is down 15.2% in price over the past month and 10.9% over the past year. While a recent study conducted by Forrester Consulting on behalf of SMAR, which revealed that the platform delivers a 680% ROI over three years could lead to increased demand for its services, the SaaS platform provider’s losses continue to grow.

Although the accelerated rollout of its platform across large companies could significantly grow its subscription revenue, the stock’s expensive valuation and negative cash flow could make investors nervous. In addition, the stock is trading 26.8% below its 52-week high of $85.65. Also, SMAR is currently trading lower than its 50-day and 200-day moving averages of $69.89 and $68.54, respectively, indicating a downtrend.

Here is what could influence SMAR’s performance in the upcoming months:

Positive Developments

This month, SMAR announced that in a new study, The Total Economic Impact of Smartsheet, conducted by Forrester Consulting, it was found that a global enterprise composite customer using its platform receives a return on investment of 680% over three years. It also revealed significant productivity gains and increased revenue delivery using Smartsheet applications in project management and other large-scale digital transformation initiatives. These findings should help drive greater demand for the software provider’s enterprise platform.

In addition, last month, the company announced that NHS England selected its Smartsheet Platform to streamline digital transformation initiatives to improve its patient outcomes.

Uncertain Growth Potential

Analysts expect SMAR’s EPS to increase 6.1% year-over-year in its fiscal year 2022 and 16.1% in fiscal 2023. However, its consensus EPS estimates indicate a 275% decrease in the current quarter, ending January 2022, and a 22.2% decline next quarter. In addition, SMAR’s EPS is expected to remain negative in the current year and next year.

A $151.66 million consensus revenue estimate for the current quarter indicates a 38% improvement year-over-year. Also, its revenue is estimated to increase 41.4% year-over-year to $545.08 million in 2022.

Mixed Financials

During its fiscal third quarter, ended Oct. 31, 2021, SMAR’s revenue rose 46% year-over-year to $144.6 million, while its professional services revenue grew 50% from the prior-year quarter to $12 million. The company’s non-GAAP operating loss came in at $2.7 million, compared to $15 million in the prior-year period. But its net loss stood at $36.7 million for the quarter, compared to $32.0 million in the third quarter of its fiscal 2021. Furthermore, its net operating cash flow totaled negative $2.2 million. SMAR reported negative $6.3 million in net free cash flow.

Stretched Valuation

In terms of forward Price/Book, the stock is currently trading at 15.72x, which is 177.4% higher than the 5.67x industry average. Also, its 14.48 forward EV/Sales multiple is 252.9% higher than the 4.10 industry average. And SMAR’s 14.27 forward Price/Sales ratio compares with the 3.92 industry average. In addition, the stock’s 656.98x trailing-12-months Price/Cash Flow is 2,807.5% higher than the 22.60x industry average.

POWR Ratings Reflect Uncertainty

SMAR has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. SMAR has a C grade for Quality. The stock’s 0.57% asset turnover ratio is 10.2% lower than the 0,63% industry average, which is in sync with this grade.

In terms of Stability grade, the company has a C. This justifies its relatively high beta of 1.45.

SMAR has a Sentiment grade of C, consistent with analysts’ expectation that its earnings will decline next quarter.

In addition to the grades I have highlighted, one can check out additional SMAR ratings for Growth, Momentum, and Value here. The stock is ranked #96 of 166 stocks in the F-rated Software – Application industry.

Bottom Line

SMAR’s number of customers with ACV of $100,000 or more grew 72% year-over-year. But the company’s negative cash balance and growing losses could cause its stock to dip further in price. In addition, given the uncertain growth outlook for the enterprise platform, we think investors should wait for a more opportune time to invest in the stock.

How Does Smartsheet (SMAR) Stack Up Against its Peers?

While SMAR has an overall C (Neutral) rating in our proprietary rating system, one might want to check out its industry peers with A (Strong Buy) ratings: Open Text Corporation (OTEX) and Commvault Systems, Inc. (CVLT).

Click here to check out our Software Industry Report

SMAR shares were unchanged in premarket trading Tuesday. Year-to-date, SMAR has declined -19.04%, versus a -2.16% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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