On Friday, UBS adjusted its outlook on Smartsheet Inc . (NYSE:SMAR), reducing the price target to $54 from $60 while retaining a Buy rating on the company's shares. The revision follows Smartsheet's fourth-quarter fiscal year 2024 performance, which saw a less-than-expected increase in revenue and billings, particularly due to challenges faced by its small and medium-sized business (SMB) customers.
The report noted that while other SMB-focused software companies within UBS's coverage, such as HubSpot (NYSE:HUBS) and Freshworks (NASDAQ:FRSH), have not indicated any significant improvement and anticipate ongoing headwinds, they have communicated a sense of stability.
In contrast, Smartsheet and Monday.com have expressed more caution, especially relative to the third quarter of calendar year 2023. It was highlighted that Asana (NYSE:ASAN) did not report any additional weakness in the SMB sector, suggesting that consolidation or optimization might be occurring more frequently among Smartsheet's customer base.
Despite the drag from the SMB segment, enterprise demand for Smartsheet's services remains stable. However, the company's guidance for a 14% year-over-year increase in annual recurring revenue (ARR) for fiscal year 2025, along with a 16-17% year-over-year growth in total revenue for the same period, did not meet analyst expectations. UBS suggests that Smartsheet is likely adopting a conservative stance in its guidance but still sees potential for a 17-19% growth in ARR and subscription revenues for the year.
Smartsheet's guidance also included a positive outlook on its operating margins, projecting a 13% figure for fiscal year 2025, which is a 200 basis points improvement year-over-year. Furthermore, the company expects an 18% free cash flow margin for fiscal year 2025, marking a 300 basis points increase year-over-year. UBS believes that there is still room for Smartsheet to achieve greater financial leverage, considering its consistent performance in maintaining the Rule of 40 over the past few years.
The report concludes by acknowledging that the deteriorating trends in the SMB market could weigh on Smartsheet's stock in the short term, especially given the stability seen in other software sectors. Nevertheless, UBS maintains a Buy rating, emphasizing that at 4 times the calendar year 2024 estimated enterprise value to sales (EV/S), Smartsheet's stock is trading at a significant discount compared to its peers with mid to high-teens growth, especially when profitability is taken into account.
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