Since cloud software company Anaplan (PLAN) went public in October, shares have been riding high. Shares were priced at $17 during the IPO and closed on the first day of trading over $24. Shares are higher now that third-quarter results have been reported -- the first report for the company as a publicly traded stock.
Cloud-based services have been some of the best-performing investments in recent years, and all indications are that Anaplan could be another winner for shareholders. However, as good as initial results may have been, exercising some prudence would be wise.
Wait, another cloud company?
The cloud-based software industry and the Software-as-a-Service (SaaS) model underpinning it has turned into an all-out craze of late. Salesforce.com (NYSE: CRM) arguably got the whole thing started years ago, and small start-ups and old legacy technology companies alike have followed suit, with varying degrees of success.
Sales growth has been well into the double digits for many, as the flexibility they offer their enterprise customers has helped fan the flames burning down old legacy operations during the current digital transformation sweeping through the global economy. Anaplan is just one more example of the success the cloud is enjoying.
As for our current subject's preoccupation, it provides "connected planning" software, enabling users across an organization to access a centralized database of information to accelerate and unify decision-making. CEO Frank Calderoni said on the recent earnings call with analysts that the service has initially been taken up for use cases involving sales, supply chains, finance, and marketing. Once an organization tests out Anaplan's capabilities, it often adds more users and adopts the software for other parts of the business.
Image source: Getty Images.
Three quarters of 2018 down...
The company reported a 124% net expansion rate in the quarter, indicating the average existing customer spent 24% more money with Anaplan than it did a year ago. Calderoni said this is the sixth quarter in a row that figure has been over 120%.
That contributed to a 40% increase in revenue during the third quarter, which incidentally is the growth rate overall for Anaplan's current fiscal year.
|
Metric |
Nine Months Ended Oct. 31, 2018 |
Nine Months Ended Oct. 31, 2017 |
YOY Change |
|---|---|---|---|
|
Revenue |
$171 million |
$122 million |
40% |
|
Gross profit margin |
72.4% |
67.7% |
4.7 p.p. |
|
Operating loss |
($82.3 million) |
($26.1 million) |
N/A |
|
Adjusted earnings (loss) per share |
($0.18) |
($0.11) |
N/A |
Data source: Anaplan. YOY = year over year. P.p. = percentage points.
There's no denying Anaplan's early success, but many investors will home in on the fact that the company runs at a steep loss -- even when you adjust for items like stock-based compensation. That's mostly due to elevated expenses related to sales and marketing as well as research and development. Like many SaaS cloud software companies, Anaplan is plowing cash into operations to promote as much sales growth as possible. Profits will be a consideration later on.
Wait and see...
That makes investing in a company like Anaplan like riding a roller coaster; it's not for the faint of heart. The stock -- currently carrying a hefty price-to-sales ratio of 16.2 -- is valued with the assumption that the company's growth rates will continue for some time. If they miss, investors could respond mercilessly.
Nevertheless, with other tech names getting clobbered over the fall months, Anaplan and its newly minted public stock has been a standout winner. However, before jumping in with both feet, I think current valuations dictate waiting before buying at these levels -- though I'll be keeping an eye on this one.
