Luis Alvarez
Smartsheet (NYSE:SMAR) is a SaaS company that offers collaboration and work management tools. It is known in the industry for its tabular interface. Like many other tech companies, SMAR stock has been hammered and underperformed by the S&P 500. While the The job management market is growing rapidly, especially in the post-COVID era, I think SMAR is facing some challenges. In this article, I would like to share some of my thoughts.
The general landscape of work management software
For work management software, no one company can serve businesses of all sizes. There are three sectors with different levels of competition.
1. The Enterprise market has companies that need systems of records for various functions. These include Workday (WDAY), Salesforce (CRM), CRM, and HRS systems. ServiceNow (NOW) is a rising star that wants to compete in the CRM business and push hard. They have more user-friendly and flexible architectural designs. However, the market is generally stable, and most companies will still do well.
2. The mid-market is where SMAR, Asana (ASAN), Lunes (MNDY), AirTable, etc. are focused. These are lightweight, low-code applications to help drive the digital transformation of midsized companies. This market is developing and growing rapidly. Everyone wants to have their pie, but some companies will disappear in the next few years. Asana and Smartsheet have their lead and are likely to hold their positions.
3. The Small and mid-business (SMB) market has become a commodity-like sector. It is very competitive and has high churn. Most customers are price sensitive, and many options are available because they don’t require a lot of complicated tools. Other than SMAR, Asana, and Monday, I know Freshworks, Zoho, Trello, Pipefy, Gusto, SugarCRM, and Clickup are well used. I’m sure there are many others.
The use cases for SMAR
As a relatively older company, SMAR has an early mover advantage because it has more years of marketing and customer relationships. SMAR is also known for its similarities to classic spreadsheets and good architecture for almost everything. It just works. Moreover, everyone knows about spreadsheets, so it is easier for SMAR to educate its customers and practice. That’s absolutely a strength.
Many types of works are ideal for spreadsheet type systems such as finance and operations. Especially for finance, I think SMAR will always find its place in that vertical.
SMAR is not unique
I think SMAR has a neck-to-neck contender. That is AirTable. It has gone through 735M series F Funding and values at 11B (almost three times that of SMAR). So AirTable has no shortage of financial support, and they seem to be more aggressive in terms of building better product interfaces and functions. There is a possibility that AirTable will catch up and become a better version of SMAR. This will not be good news for SMAR.
SMAR has shown signs of slowing down compared to Asana
The SMAR numbers look great. It guided 37% revenue growth, and customers with >50K annual contract value grew to 2,516 (Asana only 979). However, when you look at customers with >5k annual spend, Asana outperforms SMAR (16,689 vs. 15,879). These 5k customers are the growth pool of the 50K and 100K customers in the future as they continue to expand their adoption at a 130% retention rate (same for both companies).
SMAR sales are not growing as fast as Asana and Monday (As shown in the chart below). It spends less on RD with 30% of revenue compared to Asana’s 50%. In my opinion, it looks like the company is not aggressive enough in innovation, which is the most important thing for its growth.
In product development, Asana’s speed of innovation is always ahead of the curve. As its CEO said on the last call:
Speaking of products, we launched more than 200 features last year, a rate of more than four features per week. We also have a large and rapidly growing Asana Together Community, which now represents more than 3,800 Asana ambassadors worldwide.
Moreover, Asana’s forum is very active. You will find a real community there with people asking about business adoptions, new functions, different use cases, etc. I see most of the discussions on the SMAR forum are about formulas, cell linking, etc.
The stock looks cheap compared to others. However, durability is the key
As shown in the chart below, SMAR’s PS ratio is the lowest in its entire peer group at 6x. However, a low valuation does not mean that it should revert to the peer group mean. I think stock prices are a function of market confidence in a company’s future. SMAR has some shares that are undervalued by the market, so its valuations are always lower.
I think ServiceNow will be the most stable company in the peer group with an 11x PS ratio. However, should SMAR’s PS be almost half that of NOW (6x vs. 11x)? Here, I lay out some scenarios using a 10-year timeframe:
Assumption: NOW’s CAGR of sales will remain steady at 20% (likely), and NOW will be 6x its sales in Year 10. Then, the current market cap will only have a PS ratio of 1.8x.
1. The CAGR of SMAR sales for the next ten years is the same NOW at 20%. Then, SMAR’s current market cap will have a PS ratio of 1.06x in year 10.
2. The CAGR of SMAR sales for the next five years is the same NOW at 20%. Its business then decelerates at 10% CAGR from year 5 to 10. Therefore, SMAR’s current market cap will have a PS ratio of 1.83x in year 10.
Scenario 2 ends up with the same future PS valuation as NOW. This is more realistic because I don’t think SMAR NOW will be more than ten years from now.
Bottom line
Overall, SMAR is still a high-quality company that offers competitive products in specific market verticals. SMAR will definitely have a place in the work management industry. However, will it be a niche product or mainstream? I’m especially concerned about its spreadsheet-type design, although that can also be a strength in the short term. I don’t think SMAR’s products are revolutionary enough to fend off tech giants like Microsoft (MSFT) and Google (GOOG) (GOOGL) who should have more resources and know-how.