Software performance monitoring expert New Relic (NEWR 1.24%) reported third-quarter results on Tuesday evening. The company exceeded expectations on the top line but fell short in terms of profit and loss figures, and the stock fell as much as 29.4% in Wednesday's trading session.
The deeply bearish market reaction made sense in some ways. New Relic's stock had gained a market-crushing 66% in the 52 weeks leading up to this report. Shares were changing hands at a lofty 9.6 times trailing sales last night. The bottom-line miss broke a year-long streak of positive earnings surprises. I understand if some investors expected more from this report, especially since CEO Bill Staples called out "the completion of our business turnaround" three months earlier.
However, the bottom-line losses are running deeper than expected largely because the company is growing faster than expected.
"This quarter, we continued to prioritize data growth and customer satisfaction initiatives, which resulted in lower gross margins, but we believe enhances our long-term prospects," Staples said in the earnings call. "Our data ingest was higher than expected which we view as a significant long-term positive. I do believe gross margins should bottom out from here."
In other words, New Relic's customers are processing more monitoring data than ever before, which adds to the company's cost of doing business. That's a really nice problem to have, and New Relic's new haircut looks way too brutal in my eyes. If you were on the fence with this stock yesterday, you might want to buy some while this deep discount lasts.