New Relic (NYSE:NEWR), a software service and cloud operation business, is hardly a relic. It’s alive, well, and performing at its best in years.
Many skeptics have called out those investing in the cloud and software technology business. But just as software for computers was the game-changer in the late 1990s, today cloud computing is revolutionizing the way we all do business and operate in our daily lives. And there is more change yet to come.
New Relic is a particularly interesting business in this sector because it produces software to help companies ensure that everything from their hardware to their cloud technology is working as it should. And, as of late, it has been developing products within the artificial intelligence business, which is sure to make Wall Street open its eyes. Investors should certainly keep their eyes on this one.
In this research note, we explore the possibilities presented by New Relic.
Strong Financials Look Set to Improve Further
Like many cloud computing companies, New Relic has yet to turn a positive profit. However, its financial trajectory is positive and moving steadily in the right direction.
Revenue is growing significantly without costs becoming out of control. Over the last two years, revenue has boomed. It increased by 45% from 2016 to 2017, moving from $181 million to $263 million. And revenue increases continued into this year. Revenue jumped to $355mm, a 35% increase from 2017 to 2018. If New Relic can sustain this revenue at 25-30% moving forward, it should be in a strong position both within its market and financially.
Costs have increased, but have remained steady, allowing revenue to outpace cost growth somewhat. The most significant area of expense for New Relic is selling, general, and administrative expenses – much spent on marketing to new and existing clients. Further, gross margins are on a hot streak, surpassing 80% last quarter.
Besides revenue increasing, both gross profit and net income have increased significantly of late. Over the last year, gross profit increased 37% ($213 million to $292 million) and net income increased by 26% (-$61 million to -$47 million). Net income remains in the red, but has continued its upward trajectory over the last several years. If New Relic can run up its revenue and keep costs sustainable, it should turn a profit within the next several years. As we wrote above, it is not at all unusual for tech companies of New Relic’s ilk to not produce a profit.
New Relic has also produced a positive earnings surprise in each of the last four quarters (7%, 11%, 54%, 33%). Most significantly, EPS increased every single one of those quarters, growing from -$.27 to -$.10. While net income remains negative, that could soon be erased by increased revenue over the relative short term.
Overall, for a tech company of its size and scope, New Relic is performing quite strongly, especially of late.
A Leader in the APM Industry
New Relic is also a leader in the application performance management, or APM, space. It is known for its innovation and leadership, so much so that Gartner rating service has put the company consistently at the top of its APM ratings each of the last few years. Perhaps most excitingly is that New Relic is seen as the premiere leader for APM in the cloud, innovating beyond its competitors.
Further, growth within its customer base has been significant. At the end of the year, New Relic reported 17,000 paying customers, a 36% jump from the previous year. And, not only is it growing with new customers, but returning customers are coming back for more, including many very large transactions.
Potential Risks Do Exist and Should Be Addressed
As with many technology companies, particularly those in the midcap category, New Relic faces the risk of increased competition and cannibalization by larger, wealthier competitors like Cisco (NASDAQ:CSCO) or Microsoft (NASDAQ:MSFT). The cloud computing and APM businesses are growing increasingly hot.
Further, we see profitability as a potential issue for New Relic moving forward. It currently does not run a profit nor has it ever in its history. However, profitability is looking increasingly likely. The trick for New Relic will be to continue significant revenue growth while keeping costs bridled. Prices will be an issue in this, and we hope New Relic will not drastically change its pricing structure in the event it faces significant outside competition. That, certainly, would alter our view on the company.
Finally, as with every technology and consumer-based product, New Relic is somewhat at the whims of the general market, and could suffer greatly in the unlikely event of a massive tech stock selloff.
New Relic is a company of the future, providing solid, useful, and vital products and services to its clients. Its improving financial position makes it a potentially appealing – though far from riskless – play.
We see an upward trajectory in growth that has no significant reason to slow down and continued positive innovation by the company. Currently, there is a huge market for what New Relic offers. Why stop now?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.