After a hot start early in the year, shares of Qualtrics (XM) are currently sitting on a 4% decline since making their publicly traded debut in January 2021, compared to a 14% gain for the S&P 500 over that same span of time. Such underperformance isn't out of the ordinary for IPO stocks, but it is hiding a noteworthy growth story at Qualtrics. The digital experience management software firm is riding a wave of activity as organizations scramble to get their operations upgraded for the cloud era. Is now the time to buy? 

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The sole public stock in experience management

Experience management software is becoming an increasingly important tool in the business world's toolbox. With so much communication moving to a digital format -- both between employees and between companies, their customers, and other stakeholders -- capturing those interactions and learning from them is critical to success. 

Enter Qualtrics, which helps organizations study and implement all sorts of digital interactions. This is more than just an analytics platform, though. It can also help with research, digital product design changes, marketing decisions, and more.

This makes sense. Human interaction is at the root of everything we do on a daily basis, so Qualtrics' software can integrate across all sorts of business departments in every sector of the economy. "Listen, understand, and take action" sums up the experience management software niche nicely. 

Of course, Qualtrics isn't alone in the experience management department. But according to tech researcher Gartner, Qualtrics is near the top of its class in both the completeness of its platform and its ability to execute its vision. Medallia (MDLA) is the other leader in this space, but it's being bought out by private equity firm Thoma Bravo. That leaves Qualtrics as a top option in this software class, although there are other firms that do similar things, like recent "digital optimization" software IPO Amplitude (AMPL -2.02%).

From a pure financial growth standpoint, though, Qualtrics' numbers stand out. Full-year 2020 revenue increased 29% to $764 million, and the company has grown sales 37% year over year through the first half of 2021 to $488 million. Based on full-year guidance for revenue to be about $1.1 billion, management is expecting about 32% growth in 2021. 

Qualtrics also recently swung to free-cash-flow-positive territory, generating $53.7 million in Q2 2021 (a very healthy free cash flow profit margin of 22%). Shares trade for about 24 times trailing 12-month sales -- not what might be considered "cheap," but perhaps a long-term value if Qualtrics can continue expanding at a double-digit percentage clip and generate ample profits along the way.

One potential issue keeps this from being a top buy

There is one big item to be mindful of before considering Qualtrics: SAP (SAP -0.74%). The German multinational software giant acquired Qualtrics back in 2018 (under then-CEO Bill McDermott, who's now CEO of ServiceNow) and decided to hold onto a majority stake in the company during the IPO early this year (some 80% of Qualtrics is still owned by SAP). The quick turnaround from acquisition to partial spinoff might simply have been a way to boost Qualtrics' cash position as it tries to double down on cloud computing needs. 

Indeed, Qualtrics is armed with a sizable war chest. At the end of June, it reported cash and equivalents of $635 million in the bank, compared to $204 million a year ago (before it was publicly traded). However, SAP did hand off $503 million in debt for Qualtrics to deal with. 

It's still in a positive net cash position, though, and if Qualtrics stays free-cash-flow positive from here on out, its liquidity stockpile will grow further. However, with SAP still likely to be pulling the strings (at least to some extent) behind the scenes, Qualtrics may not be in total control of its own destiny. SAP is trying to manage a migration of its own operation and its products to a more modern cloud computing-centric model. Its interests may not fully align with those of other Qualtrics shareholders.

Then again, Qualtrics gaining some freedom to go its own way could be a great long-term situation, and its execution since its IPO is promising. But there are a lot of great cloud stocks out there putting up similar performance that don't have a majority-controlling legacy software overlord.

At the very least, though, I think Qualtrics stock is worth keeping tabs on, especially as it's now the lone publicly traded leader in the fast-growing experience management space.