What happened
Shares of performance-monitoring company New Relic (NEWR) were down 14.8% in February, according to data provided by S&P Global Market Intelligence. The stock started falling from a lackluster earnings report on Feb. 5, and once Wall Street became volatile later in the month, there was nothing to keep New Relic's stock from falling even further.
So what
If investors only focused on New Relic's revenue, perhaps the sell-off wouldn't have been so dramatic. In the third quarter of fiscal 2020, revenue of $153 million beat the company's own guidance of $148 million to $150 million -- good for 23% growth year over year. Furthermore, it raised its full-year guidance to $594 million to $596 million.
Image source: Getty Images.
But here's where things get concerning. New Relic missed its earnings guidance. Its net loss accelerated from $8.5 million last year to $24.2 million this year. In 2019, it launched its new platform New Relic One -- the product designed to carry the company to $1 billion in revenue in fiscal 2023. The net loss in Q3 and the net loss it's guiding for in the next quarter is due to increased labor costs related to its growing sales team.
Spending money to grow your sales team makes sense when trying to push a new fancy product. But again, there's reason for concern. As a software-as-a-service (SaaS) company, it's important to track New Relic's dollar-based net expansion rate (DBNER) -- a metric that measures existing customer spending. Logically, a better product and an increased sales staff would grow customer spending. But in reality, New Relic's DBNER fell to 109% -- down from 122% last year. Not a great start.
Now what
Lackluster results like this is why New Relic sold off in February. The stock did sell off a little more toward the end of the month as the market fell, but a SaaS company like New Relic is unlikely to be directly effected by the coronavirus. That said, investors didn't exactly have a compelling reason to rush and buy shares of New Relic during a broad market correction.
Going forward, the guidance to grow revenue over 66% in the next couple of years is impressive. I'm sitting on the sidelines -- at least until New Relic One shows more evidence of being the product it's advertised to be.
