Don’t Miss Smartsheet’s Surge: Strong Growth and Buybacks Ahead

Key Points

• Smartsheet delivered stronger-than-expected quarter results, so a few Wall Street investors sought to buy more of the company and even bid for it. 
• Subscription revenue flowed into predictable free cash flow, enabling management to initiate a bigger buyback program. 
• Citigroup analysts raised their price targets ahead of the potential takeover bidding war.

As the S&P 500 settles from last week’s volatility, investors may be looking for safety or some fundamental reason to shift into a particular area of the stock market. They don’t have to do the hours of work and research necessary to find these places, as some of Wall Street’s best have already laid out their view for the near future. One thing they must understand, though, is that the safety and predictability of cash flows will be at the forefront of their minds in the coming quarters.

With an election underway and major potential policy shifts coming from the Federal Reserve, it is critical to attempt to front-run where money will be shifting in the next six months. While this cannot be precisely forecasted, a few characteristics will be valid during this uncertainty. Businesses will learn to cut costs and streamline their operations if the marketplace becomes too volatile, and that’s where the technology sector comes into play.

Specifically, shares of Smartsheet Inc. NYSE: SMAR provide the type of service that allows businesses to streamline their services in one cloud-based software application. While this space may be dominated by players like Microsoft Inc. NASDAQ: MSFT and Amazon.com Inc. NASDAQ: AMZN, it is Smartsheet that can tap into the small to medium-sized business arena with their services, and that is why some on Wall Street want to buy a big chunk of the stock.

Smartsheet's Strong Financials Pave the Way for a Promising Future

Investors may focus heavily on revenue when gauging a stock's cycle; however, a specific type of revenue matters more in today's market. Recurring or subscription revenue sources are rightly valued above traditional and unpredictable revenue sources.

In the case of Smartsheet, total revenue grew by 17% over the past 12 months to reach $276.4 million, out of which $1 billion came from recurring revenue in the form of subscriptions for the company's cloud software services. Wall Street analysts commented on this stability and predictability in cash flows.

The earnings per share (EPS) forecast is now set to grow from a net loss of $0.21 a share today to a net gain of $0.03 a share in the following 12 months. This giant swing can explain the stock's further upside, which the market delivered after the company's earnings results by rallying by 20% in a single day.

By locking in more than 70 clients with more than $100,000 in annual recurring revenue, Smartsheet management was able to approve a share buyback program of up to $150 million in size for shareholders. The company's record free cash flow (operating cash flows minus capital expenditures) of $57.2 million today is funding this program.

Confident in the company's 113% retention rate, management is also guiding for better figures for the rest of the year. It is now expecting to see up to 16% revenue growth for the next quarter and a net 14.5% jump for the year. Here's where some on Wall Street found a discrepancy worth squeezing, though.

Blackstone and Vista Eye Smartsheet Before Adjustments are Made

Knowing that Smartsheet delivered up to $0.06 EPS in the past quarter alone, those at Blackstone and Vista might have noticed that current Wall Street estimates for only $0.03 may be on the lower end of the spectrum and require adjustment.

Currently, private equity investment fund Vista owns just over 4.7% of Smartsheet, a stake that Blackstone wants to take away at a $7 billion valuation. The stock already trades at $7.2 billion today after the earnings rally, so Vista and other large shareholders might want to ask for a better premium from Blackstone if they are seriously considering buying out the company.

Initially setting a price target of $55 a share for Smartsheet stock, analysts at Citigroup decided to boost their views up to $63 a share, daring the stock to rally by as much as 20.5% from where it trades today. But that’s not all that’s in store to support a potential bull case for Smartsheet.

Up to $880 million in institutional capital has entered the company over the past 12 months, and Eminence Capital led the way recently by boosting their positions by 9.2% as of August 2024. This recent addition brought their net investment to $187.4 million today, or 3% company ownership.

Seeing that Smartsheet carries 90% institutional ownership is a plus for shareholders, as more institutions have to fight a potential bid set by Blackstone, which will likely have to be pushed higher to be accepted – let alone considered – by the board today.

Even bears decided to stay away from this name despite the recent selloffs in some of the technology sector’s leaders, like NVIDIA Co. NASDAQ: NVDA. Smartsheet’s short interest is now a low 1.2% of the float, showing that bears are not interested in shorting this company. This shows another potential bullish factor helping this stock.