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Why Smartsheet Stock Is Tumbling Today

By Jon Quast – Updated Sep 3, 2020 at 11:33AM

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Despite beating second-quarter guidance, investors are selling because management's outlook isn't as optimistic as they would like.

What happened

Shares of Smartsheet (SMAR -3.31%) tumbled on Thursday, after the company reported earnings for the second quarter of its fiscal 2021. It enjoyed robust revenue growth during the coronavirus-impacted quarter. But the stock was already outperforming the market average in 2020, and guidance wasn't as enthusiastic as investors hoped.

It also doesn't help that Smartsheet reported last night, considering the market is down big today. Many cloud-based companies are selling off anyway. Exacerbated by the market sell-off, the stock of the workflow-automation platform was down 14% as of 11:45 a.m. EDT today.

SMAR Chart

SMAR data by YCharts.

So what

In Q2, Smartsheet's revenue grew 41% year over year to $91 million, ahead of its guidance of $86 million to $87 million. Its free cash flow was negative $4.4 million. But again, this was ahead of guidance for negative $11 million to negative $9 million, and much improved from last year when its free cash flow was negative $7.3 million.

Smartsheet landed new customers during the quarter, and some existing customers increased their spending, demonstrating how little effect COVID-19 had on the business. And the bottom line improved, in part due to reduced spending in marketing and travel.

A frustrated man lays his head on a table with a red, down stock chart in the background.

Image source: Getty Images.

Now what

Management provided guidance for the upcoming third quarter and for the year. Next quarter, year-over-year revenue growth is expected to decelerate to a range of 31% to 33%, which would be revenue of $94 million to $95 million. For full-year fiscal 2021, it expects revenue of $367 million to $373 million. 

Breaking down the full-year revenue number, Smartsheet has already generated $176.7 million in the first half and expects $94.5 million at the midpoint of Q3 guidance. Therefore, it expects fourth-quarter revenue of $95.8 million to $101.8 million.

In the fourth quarter of fiscal 2020, Smartsheet reported revenue of $78.5 million. Therefore, Q4 revenue guidance represents 22% to 30% year-over-year growth. In other words, Smartsheet's growth is expected to slow in each of the next two quarters, and investors don't like that. The technology stock is selling off today as a result.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Smartsheet. The Motley Fool has a disclosure policy.

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