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Down 34% From Its Highs, Is It Time to Buy Medallia?

By Anthony Di Pizio - Jun 19, 2021 at 8:00AM

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In the big data "gold rush," this company sells picks and shovels.

As more of the world's business activity moves online, many companies are finding themselves in possession of mountains of valuable data that they don't know how to analyze. It might be information on purchasing patterns, or the sum of all the chatter about a brand on social media networks, but it can be a major challenge to sift through this big data and parse it in a way that produces a commercial benefit.

Medallia (MDLA) seeks to address that challenge with artificial intelligence-driven tools designed to extract the value from all the noise. 

Big data is big business, and while Medallia is not yet profitable, its revenue growth is strong -- a sign of increasing demand for its software and the intensifying corporate needs in this area. With over 1,000 leading brands among its customers, Medallia looks set to outperform.

People gathered around a marketing pitch

Image source: Getty Images.

How it works

Medallia delivers all of its solutions via the cloud, so customers aren't required to have a complex network infrastructure to run the software. It pitches its capabilities in three clear parts.

Capturing signals is the first step. Medallia integrates with each customer's branding and uses several means to gather data. For example, it might use a text message to ask a hotel guest about their experience. It uses artificial intelligence to monitor more than 25 social media and review sites, automatically flagging potential ''risks'' (mentions of negative experiences left by customers). It can also use its voice interaction tool, which instantly transcribes phone calls with customers, and analyzes the conversations to highlight areas where improvements could be needed. 

Then, it analyzes the collected data and uses it to make predictions. Using its text analytics tool, machine learning processes customer reviews and commentary at scale, creating an ''impact score'' for a particular product or service that allows companies to recognize where they need to make improvements far more quickly. Customers often leave helpful suggestions about products and services -- Medallia's action intelligence aggregates them to see if many people are saying the same thing. 

Finally, Medallia helps companies take action by engaging their customers, meeting them where they're at -- whether that's via messaging, email, or on social media. More importantly, its services help guide companies to make the changes to products and services that their customers are looking for. 

Improving financial performance

As a software-as-a-service company, Medallia relies heavily on recurring (subscription-based) revenue. Its financial metrics are trending in the right direction, with revenue growing an average of 22.3% per financial year between 2018 and 2021.

Metric

Fiscal 2018

Fiscal 2019

Fiscal 2020

Fiscal 2021

Q1 Fiscal 2022

Revenue

$261.1 million

$313.6 million

$402.4 million

$477.2 million

$131.3 million

Earnings per share

($3.12)

($3.07)

($1.35)

($1.03)

($0.34)

Source: Company filings. Medallia's fiscal years end on Jan. 31.

More importantly, losses have also narrowed substantially as it has kept its expense growth lower than revenue growth (for the most part). In fiscal 2021, which ended Jan. 31, sales, marketing, and research and development comprised over 77% of total operating expenses, indicating the company is aggressively geared toward expansion.

Medallia spent 104% more on sales and marketing in fiscal 2021 than it did in fiscal 2018, and has added 124% more single enterprise customers since fiscal 2019 (which is when it started reporting customer growth) -- suggesting those investments are generating returns.

Looking forward

Last week, news leaked that Medallia management might be exploring a sale of the company. That sent the stock significantly higher Friday, but the rumors are still unconfirmed.

However, the company's inching closer to profitability, and even in the wake of Friday's share price jump, on Friday afternoon, Medallia was still trading about 34% below its February peak, so this could be a great time to consider adding the stock to your portfolio.

The possibility of a larger tech player taking a major stake or buying the company outright may get investors' attention. But even so, potential investors should primarily focus on its continued revenue growth, and how its customer base keeps growing. Companies are steadily learning more about the power of the data they are generating and gathering, and becoming more aware that they risk being left behind by their rivals if they don't make the most of it. 

Medallia offers a value proposition to its clients that is unrivaled when it comes to managing customer feedback (whether good or bad). Fast, actionable insights are essential in our connected world, where product news travels at a rapid pace -- and Medallia helps provide them.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Medallia Inc. The Motley Fool has a disclosure policy.

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