Smartsheet (SMAR) is making waves in the financial world, thanks to its impressive growth, operational excellence, healthy cash flow, and attractive capital returns. This combination has caught the eye of private equity firms, who are reportedly in talks to acquire the cloud-based workflow and project management company. They see a significant opportunity in Smartsheet’s strong business model and potential for future growth.
The takeaway for investors is simple: Smartsheet is either going to be acquired at a premium to its current price, or it won’t. If it does, investors stand to make a quick 10% return, and the gains could be even greater if the acquisition doesn’t happen. But what exactly makes Smartsheet so attractive?
Smartsheet’s success is built on a strong foundation of client relationships. The company counts almost 85% of the Fortune 500 and 90% of the Fortune 100 among its clientele, a testament to its utility and value in the business world. The acquisition talks center around a potential partnership between Vista Equity and Blackstone (BX), with reports suggesting they are nearing a final agreement worth $8 billion. If this deal goes through, it would rank among the largest takeovers of the year. The $8 billion price tag translates to roughly $56 per share, representing a nearly 10% premium to Smartsheet’s current market cap, with shares currently trading near $52.50.
Smartsheet’s recent Q2 results further reinforce its growth potential. While revenue growth is slowing, the company still reported $276.6 million in revenue, a 17% increase compared to last year, exceeding analyst expectations. This growth is driven by increasing client count and deeper penetration of Smartsheet’s services. Subscription revenue, the company’s core business, saw a 19% increase, offset by an 8% decline in Professional Services. But the real highlight of the report lies in the company’s impressive margin expansion. Both GAAP and adjusted margins saw improvement across all levels. Adjusted margin, which is crucial for cash flow, jumped 800 basis points to 16%, doubling last year’s results. This resulted in a GAAP profit of $0.06, a significant improvement from last year’s losses. Adjusted EPS nearly tripled to $0.44, exceeding analyst expectations by a remarkable 50%.
Smartsheet’s cash flow and free cash flow (FCF) also reached record highs. FCF reached $57.2 million, representing 21% of revenue, and is expected to remain strong in the foreseeable future. This robust cash flow further underscores the company’s financial strength and its ability to fund growth and potentially acquire other companies.
While Smartsheet’s cautious guidance might seem like a slight drawback, it’s actually aligned with robust analyst expectations. The company expects sequential and year-over-year revenue growth, with YoY growth slowing to a pace of 15% to 16%. This low bar sets up potential for upside surprises. Earnings are projected to be around $1.375 for the year, another low bar to beat, considering the strong momentum in revenue growth and expanding margins. This has led analysts to raise their price targets for Smartsheet stock.
The technical picture also paints a positive outlook for Smartsheet. The stock is moving up from the bottom of its trading range and appears poised to break out and reach new highs. While the current highs are providing some resistance, a breakout is possible. If it happens, technical targets suggest potential gains of $26 at the low end and up to $100 at the high end, based on the magnitude of the trading range.
Overall, Smartsheet’s impressive performance, acquisition rumors, and strong technical indicators make it a compelling investment opportunity for traders and investors alike. The company’s continued growth and profitability, coupled with the potential for a lucrative acquisition, suggests that Smartsheet is positioned for further success in the years to come.
