Cloud Stocks: Might Zoom Acquire Smartsheet?

I’m publishing this series to discuss a topic that I follow closely — cloud stocks, trends, strategy, acquisitions, and more. I like fundamentals-focused business building, and outline the principles of fundamentals-focused business building in my free Bootstrapping course.

A report published earlier last year expected global team collaboration software market to grow at 13% CAGR from $9.5 billion in 2019. The current pandemic has further increased the adoption of enterprise collaboration solutions. Companies like Smartsheet (Nasdaq: SMAR) are benefitting from this growth.

Smartsheet’s Financials

For the quarter, Smartsheet’s Q3 revenues grew 38% to $98.9 million ahead of the market’s forecast by 4.7%. Net loss was $0.12 per share, which was significantly better than the market’s estimated loss of $0.22 per share.

By segment, Subscription revenues grew 41% to $90.9 million, and Professional services revenue grew 12% to $8 million.

Among operating metrics, customers with annualized contract value (ACV) of $5,000 or higher increased 33% to 11,172. Customers with ACV of $50,000 or higher grew 73% to 1,331 and customers with ACV of $100,000 or higher soared 81% to 504. Its net dollar retention rate was 125% in Q3 and average ACV per domain-based customer increased 42% to $4,665. Calculated Billings grew 22% to $98.93 million.

For the fourth quarter, Smartsheet expects revenues of $102-$103 million and non-GAAP net loss per share of $0.15-$0.13. The market was looking for revenues of $99.48 million with a loss of $0.13 per share. Smartsheet expects to end the year with revenues of $378-$379 million with a loss of $0.44-$0.42 per share. The market was looking for revenues of $370.61 million for the year with a net loss of $0.52 per share.

Smartsheet’s Product Upgrades

During the quarter, Smartsheet announced several product upgrades including a no-code platform WorkApps; an automation engine Bridge; and 10,000ft Panel for Smartsheet. WorkApps is a no-code platform enabling organizations to create custom desktop and mobile applications on the Smartsheet platform. The feature will allow organizations to build apps that can leverage forms, dashboards, reports, and data taken from Smartsheet and other external applications such as Tableau dashboards and Google Docs. It supports personalization around roles, allowing a single application to work across organizations with different data visibility and functionalities.

Earlier this quarter, it released Bridge, a no-code automation engine that streamlines business processes by enabling workflows across applications and systems of record. Bridge lets organizations build complex, high-value workflows across mission critical platforms through an easy-to-use, no-code user interface. It helps reduce time spent on manual and repetitive tasks using workflows that are triggered to run based on various actions.

It also integrated the features of 10,000ft within the Smartsheet platform. The integration will allow users to visualize the team’s capacity by understanding each team member’s total availability from all of their projects. Teams will be able to see each member’s total planned workload in Smartsheet based on the assigned tasks, allowing them to understand the big picture of project resourcing needs. It will also allow them to create teams in every project with real-time preview in 10,000ft, balance bottom-up task execution with top-down staffing with everyday tracking in Smartsheet, while simultaneously maintaining a resourcing plan of record.

Smartsheet was in the news recently as RBC Capital Markets analysts predicted that Zoom should evaluate the possibility of acquiring it to compete more effectively. The researcher believes that the acquisition would help turn Zoom into a collaboration giant. At present, Zoom facilitates virtual meetings, but it does not have very robust collaboration software tools. Smartsheet’s acquisition will definitely add to that portfolio.

Zoom has had a strong year so far. Its stock is currently trading at $389.48 with a market capitalization of $113.37 billion. A year ago, the stock was trading at a comparatively modest price of $62.02. For the third quarter, Zoom had recorded revenues of $777.2 million with an adjusted EPS of $0.99. Zoom was looking to end the year with revenues of $2.575-$2.58 billion and an EPS of $2.85-$2.87.

Meanwhile, Smartsheet’s stock is currently trading at $70.18 with a market capitalization of $8.58 billion. It had fallen to a 52-week low of $30.91 in March this year. In recent months, Smartsheet’s valuation has soared. It will be a pricey buy for Zoom, but it can surely afford to buy Smartsheet at its current valuation.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article.

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Founder of the 1M/1M global virtual incubator