Smartsheet Inc. shares turned in their worst day in three years after Wall Street acknowledged that the soft business spending environment had finally caught up with the cloud-based work-management platform provider.
Smartsheet
SMAR,
shares fell as much as 21% to an intraday low of $38.58, and finished down 17. 5% at $40.44, their worst-performing day in three years, since June 4, 2020, when shares dropped 23%. Smartsheet went public in April 2018.
Smartsheet shares are up 2.7% for the year, compared with an 11.8% advance by the S&P 500
SPX,
and a 26.5% gain by the Nasdaq Composite
COMP,
Meanwhile, the iShares Expanded Tech-Software Sector exchange-traded fund
IGV,
and the First Trust Cloud Computing ETF
SKYY,
are both up about 28% year to date.
Late Wednesday, Smartsheet’s otherwise strong earnings report was marred by a billings miss and a free-cash-flow (FCF) outlook for the year that fell short of the Wall Street consensus at the time. Last quarter, the company issued a “conservative” outlook amid a tough business spending environment.
Guggenheim analyst John DiFucci, who has a buy rating and a $57 price target on the stock, said soft small-to-midsize business transactions and elongated sales cycles were the main culprits in Smartsheet’s report.
“The company is seeing effects of a soft macro backdrop, albeit later than most others in our coverage universe who have been seeing new business declines for most of 2022,” DiFucci said.
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“The bottom line here is the macro softness is something everyone is dealing with, but there is nothing in Smartsheet’s model that would preclude it from achieving the long-term FCF characteristics we would expect from most software companies with scale and maturity,” DiFucci said. “We believe it’s facing a tremendous greenfield opportunity and stands as the most enterprise ready solution in the class.”
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D.A. Davidson analyst Robert Simmons, who has a buy rating and a $57 price target, also pointed to the macro weakness despite the strong results for the quarter, but he was a little more cautiously optimistic.
“Macro is impacting the company in multiple ways, with [small-to-midsize business]/mid-market weaker and longer sales cycles upmarket, but growth remained above 30%, and the company is delivering upside to margins; we see little downside to current numbers, though the degree of upside is difficult to gauge,” Simmons said in a note Thursday.
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Oppenheimer analyst George Iwanyc, who has an outperform rating and a $55 price target, said that while the company beat FCF estimates for the quarter, the outlook would weigh on the stock.
“Management remains cautious with respect to macro pressures and lengthening deal cycles, providing unchanged [fiscal year 2024] revenue and billings guidance that could disappoint investors,” Iwanyc said.
Of the 21 analysts who cover Smartsheet, 17 have buy ratings and four have hold ratings, along with an average price target of $52, according to FactSet data.
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