Of all the initial public offerings of 2017, MuleSoft (NYSE: MULE) may be the most intriguing. The company's Anypoint Platform allows users to link disparate applications, databases, and other sources of information into composable applications programming interfaces (APIs), which greatly speeds up innovation and is a vast improvement over traditional manual integration services. Anypoint seems to be a really useful platform for a growing list of large companies, and MuleSoft has a first-mover advantage as the inventor of the application network.
The market has been excited as well, giving the company a very high 13.5 price-to-sales ratio. Last quarter marked a continuation of the impressive numbers MuleSoft has been putting up all year in the wake of its March 2017 IPO: Revenue grew 60.3% to $88.7 million, beating analyst expectations, and the company's guidance for the upcoming quarter was $82 million to $84 million, well ahead of analyst estimates of $78.5 million. Still, the 17% surge in MuleSoft's stock was likely due to the longer-term outlook management decided to give investors to wrap up its first year as a public company.
The 2021 outlook
While many companies give guidance for the upcoming quarter or even the upcoming full year, MuleSoft management went further, giving investors a longer-term revenue target of $1 billion in 2021. That's a significant increase over the past year's $296 million and would amount to an annualized growth rate of 35.5% over four years.
That's strong and sustained growth and the fact that management thought it could project that far out signals confidence in the company's large market opportunity, as well as its ability to generate customer wins over potential challengers. Management may be so confident in reaching its target because it claims to operate in a huge addressable market of $27 billion for integration software, and $443 billion for integration services.
MuleSoft's strong adoption has been largely related to new enterprise use cases, such as omnichannel retail, the Internet of Things, and other solutions that require agile integration of resources across the modern enterprise. However, management also noted that as companies become more familiar with its technology, MuleSoft is beginning to be called upon to replace legacy point-to-point integrations that were manually stitched together using previous, less-sophisticated techniques.
Stepping on the gas
As the pioneer of the Anypoint platform, MuleSoft is thought to be well ahead of competitors in this API-based application network service and has invested heavily to retain that lead. It has increased its number of employees from 841 to 1,140 over the past year, and more than doubled research and development investments from $8.7 million to $18 million in the fourth quarter.
Understanding the importance of recruiting top talent in a competitive tech world, management was keen to point out the company's recent honor as the top midsized company to work for by the Bay Area News Group for five consecutive years, as well as similar employee-related honors from The San Francisco Business Times, Silicon Valley Business Journal, and other publications in the U.K., Argentina, and Australia.
Costs linked to robust sales
While some may point out the company's lack of profitability and the fact that last quarter's net loss per share of $0.12 only met analyst expectations, the loss was mostly due to higher commissions, which came as a result of the quarter's robust sales, as total customers increased 20% over last year. Therefore, ironically, the rapid sales growth in the quarter actually caused the earnings miss, according to management.
These up-front costs should benefit the company over the long term -- customers tend to increase their spending with MuleSoft over time as they build more APIs on Anypoint. For instance, in the fourth quarter, the dollar-based retention rate (which measures what the same client spent this year versus last year) was 119%, an acceleration even over the 117% figure at the IPO, and up from 116% last quarter, Average revenue per customer increased in tandem to $185,000, up from $175,00 in the previous quarter.
Worth the price?
While some may scoff at MuleSoft's high price-to-sales ratio and continuing operating losses, the stock's rise seems justified if the company continues to outperform its already-robust guidance. With a leading position in a large addressable market, MuleSoft continues to be one of the more exciting names to watch from 2017's IPO class.