SurveyMonkey (SVMK) develops survey software products and customized solutions used to gauge the overall sentiment of key stakeholders. The company provides timely and actionable insights about customers, employees, and other stakeholders to enterprises. The mission-critical nature of these offerings has been further highlighted during this pandemic. Companies are increasingly relying on the unique insights generated from SurveyMonkey’s People Powered Data platform to adapt to the new economic order.
SurveyMonkey stock was not spared during the broad market sell-off of March 2020. Share prices however have now recovered and the company last closed 19.36% up on a YTD (year-to-date) basis. Although investors seem to be recognizing the COVID-19-resilient nature of the business, there still remains much upside in the stock.
SurveyMonkey is offering an essential service in these uncertain times
The pandemic has unleashed a period of intense uncertainty across the world. Businesses have been increasingly struggling to adapt to these changed conditions. Since there has been no such time in modern history, most organizations are clueless about the most important aspects of the changing economy. Companies need intelligence about employee expectations and behavior in a work-from-home environment and appropriate technology solutions to improve productivity. They need information about changing consumer demand and spending patterns. Companies also require intel to support their HR (human resource) and marketing strategies. Timely feedback can help them take appropriate business decisions.
SurveyMonkey is also committed to supporting its customers as the economy slowly opens up to face the pandemic head-on. The company has come up with a return to work offering for enterprise customers which can ensure the safe return of the employee to the office environment.
Survey solutions and consulting and technology integration services are addressing these challenges for government and private organizations, non-profits, and educational institutions. In the first quarter, the company added multiple large organizations such as Informatica, Kraft Heinz, Unilever, Travix, Darden Restaurants, to its client list. The company has also collaborated with Boston Children’s Hospital and the Harvard Medical School on a joint project called COVID Near You. This project aims to help citizens and public health agencies become aware of COVID-19 hotspots.
The company boasts of a resilient business model
In the first quarter, SurveyMonkey reported revenues of $88.27 million, a YoY growth of 28.59% growth, and ahead of the consensus estimate by $2.76 million. Enterprise sales reported a YoY rise of 128% and emerged as the key growth driver for the company.
Enterprise sales accounted for 29% of total revenue in the first quarter of fiscal 2020, significantly higher than the 16% in the first quarter of fiscal 2019. Enterprise customer count also jumped 75% YoY to 6,800. Now, this is a segment, where some customers are accelerating the uptake of the company’s products while some others are deferring purchases. So, we have healthcare organizations and government agencies rapidly adopting SurveyMonkey products as they gear themselves to fight against the pandemic. In addition to a solid jump in enterprise customers, the company also reported a 35% YoY increase in average contract value in this customer segment.
SurveyMonkey’s subscription-based business model lends it a high degree of revenue visibility. More than 90% of its revenues are recurring and around 85% of revenues are from annual subscription clients. In the first quarter, the company saw more than 90% of the company’s trailing twelve-month bookings from organizational domain-based customers. The company has reported a dollar-based net retention rate over 100% in this customer segment.
Clients opt for monthly or annual subscriptions. When clients choose multi-year subscriptions, the committed amount is recorded as deferred revenue until revenue is recognized. Hence, the deferred revenue is a major indicator of top line performance in subsequent quarters. The company’s deferred revenue rose 37% YoY to $152 million in the first quarter. The company’s RPO (remaining performance obligations), a combination of deferred revenue and backlog, rose 39% YoY to $169 million. Hence, we can continue to expect healthy top line performance for SurveyMonkey in the remaining part of 2020.
SurveyMonkey’s diversified customer base is also a major positive for the company, especially in these uncertain times. The company has around 16 million active users and over 600,000 paid users on its platform. Yet, the company did not have revenue exposure greater than one percent to any of its customers in the last twelve months. Further, only 5% of the company’s 2019 bookings came from customers in COVID-19-affected sectors.
SurveyMonkey has managed to successfully leverage the strengths of both direct selling channels and self-serve channels. Self-serve offerings are mainly focused on small groups of individuals in an organization who do not require the advanced features of the company’s Enterprise survey offerings. The self-serve channel is not only more cost-effective but has also been a major lead generator for the company’s enterprise business.
SurveyMonkey has a presence in over 199 countries and territories. The company has managed to make its presence felt in international markets such as France, Netherlands, and the United Kingdom. The company is focusing on transitioning to enterprise sales in markets where it already has a significant self-serve footprint. Currently, SurveyMonkey is reporting 30% YoY growth in international sales.
In the first quarter, SurveyMonkey generated $4.0 million in operating cash flows and $1.0 million in free cash flows. The company had cash worth $145 million and a $70 million unused revolver line at the end of the first quarter. The company’s debt was $215 million. These metrics highlight the strength of SurveyMonkey’s balance sheet.
For the second quarter, the company is projecting revenues of $87 million-$90 million, implying an 18% YoY growth at the midpoint. The company also expects non-GAAP operating margin to be 0%-2% in the second quarter. The company has already seen the highest ever demand in April 2020 and expects the majority of these deals to close in June 2020.
Investors should consider these risks
Although the company’s revenues are resilient to short-term fluctuations, they are definitely not completely immune to extended periods of economic downturn. There would be higher churn rates and delayed sales cycles for customers in affected businesses. The company recognizes the inherent uncertainty in today’s markets and has withdrawn its 2020 outlook. To prepare for more difficult times, the company is slashing capex and hiring. Although this can help margins in the short term, it can also affect the company’s overall growth trajectory in the long run.
The self-serve channel has been reporting higher churn rates during these pandemic times. However, a solid uptick in new user demand for self-serve channel and growth in enterprise sales has managed to offset this impact.
The company faces tough competition from form providers such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT), licensed enterprise feedback software providers, market research firms, and other software companies.
Finally, SurveyMonkey is currently not a profitable business. Some investors may prefer to stay away from loss-making companies during the economic downturn.
What price is right here?
According to finviz, the 12-month consensus target price for SurveyMonkey is $23.00. I believe that this share price is too low for the company considering the essential nature of its service and business resilience in the current economic environment.
The majority of analysts are optimistic about the stock. On May 18, Wells Fargo analyst Brian Fitzgerald upgraded the company’s rating to Overweight from Equal Weight and increased the target price from $21 to $25. On May 14, Needham analyst Ryan MacDonald initiated coverage of the stock with a Buy rating and target price of $24.
Today, SurveyMonkey’s services are required to gauge the pulse of the market. Hence, despite the high forward PE of 361.53x, I believe that this growth stock will rise up to $25 in the next 12 months. I recommend growth-focused investors with above-average risk appetite and an investment horizon of at least a year to consider adding this stock.
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.