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Tickers mentioned in this show: WK
Tidal River Investments positions the day after the first show airing:
Long: NFLX, ETSY, SPY, TDOC, U, Z, ZG, WK
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Welcome to Fluctuating Tides, the Podcast, Episode 5. I’m your host, SomeCodingGuy, and let’s get right to it!
This week I’m going to be covering Workiva Incorporated, ticker WK, a company focused primarily on compliance and regulatory filings for public companies. Workiva has created a series of products to help with these tasks mainly by integrating with existing enterprise systems, to collect all the data required and to automate a lot of the busy work done by public companies every quarter, and has a loyal and growing customer base.
For this week’s knowledge segment, we’re going to look at 2 commonly used fundamental metrics that relate the stock price to the money that a company earned. Since both of these use the current share price, first we’re going to have to convert the money earned to a per-share basis to compare apples to apples.
Investors often talk about earnings in terms of either top line or bottom line. Top line earnings refers to revenue, or the total sales that a company collected in a given period - as usual, we’ll be using quarterly periods, the same as in previous podcasts, so 3 months. Revenue is called Top Line, because it is literally the first line that is shown on the profit and loss statement. Similarly, bottom line earnings generally refers net profit or loss, which is basically revenue with all of the costs for the quarter taken out. What’s left over is often just called “earnings”; “net profit” if it’s positive, or “net loss” if it’s negative. This is also called bottom line earnings, since it’s often at the end of the same statement.
Well what do we do with these numbers? If we take the net profit, or the bottom-line earnings, divide it by the number of shares of the company, we end up with the earnings per share, or EPS. If the number is negative, it’s really a net loss per share, but we optimistically refer to the quarterly report as earnings, even if they are actually… not earnings; Wall Street sure does love its euphemisms. On the same token, the quarterly investor conference call that comes with the 10-Q is generally referred to as the earnings call, even if it also resulted in a loss.
What about if we use the top line figure instead of the bottom line figure? The same as with net, we could just as easily calculate the revenue per share, which doesn’t really have a short name, since it isn’t usually reported on its own.
The rather well known Price to Earnings ratio, or P/E as it is commonly called, relates the current stock price to the Earnings Per Share or EPS, based on the bottom line figure. Investors will often use these terms interchangeably, referring to EPS as earnings, or earnings by its EPS. You can usually tell the difference by how big the number is - If the number is small, they’re probably giving it in terms of per share, instead of absolute numbers. This will also be negative if the company lost money.
Just as we related the stock price to the bottom-line figure with P/E, we can also relate the stock price to the top-line figure, which is usually called price-to-sales, since sales is just another way of referring to revenue. Price to Sales is often used in cases where it’s a little too early for the company to have regular earnings, such as in the early growth stages of a tech company, but we can still get a sense of how much how many dollars an investor is willing to pay for each dollar of sales, also useful for comparing with other companies in the same line of business. Keep in mind, comparisons of price-to-sales or price-to-earnings across industries are not very meaningful, and we also have to account for the age of the company, which gives us a sense of the maturity of its revenues given its current stage.
What do we do with these figures? Given a lot of caveats, they can give us a quick sense of whether a stock is currently over or undervalued, but just as with all fundamental metrics, there is no one-size-fits-all answer number for every situation. Oftentimes for new companies that have only been public for a few years, I like to use price-to-sales and the rate sales are growing as fundamental measures of how the company is doing early on. At that stage, I don’t pay that much attention to earnings per share, other than to keep an eye on how costs are growing with respect to revenue. It’s very common for an early-stage growth company to be plowing all of its available capital into more growth, to expand their maximum market potential, before focusing on organic growth with each customer.
Armed with price to sales, and since Workiva is really too new to be profitable, we can see from last quarter’s numbers that the price to sales ratio is very high, currently around $17 per share. Thinking about that another way, right now investors are willing to pay $17 for each dollar of revenue that Workiva is generating, which is very high, even for the financial and tech industries. The stock has run up quite a lot over the last year, so it’s not surprising that the price to sales has shot up with it, but it’s worth noting that whatever else we say about Workiva during our analysis, it certainly is not cheap at the moment, on this basis. As of the most recent quarter, they’re still showing a net loss on the bottom line, so it’s a little too early to focus much on earnings per share, but it’s also worth noting that they have been consistently growing earnings and revenue for the last six quarters, maybe even longer.
What does Workiva do? Their core business is helping public companies handle compliance and regulatory filings, such as arranging all of the data in XBRL format for the SEC, a task that public companies are required to do every quarter. At the moment, 75% of the Fortune 500 is currently using at least one of their services, and 952 of the nearly 4,000 customers are paying for annual contracts with them over $100,000 a year; of them, 500 are paying more than $150,000, which management has projected will add up to $401m for this year alone. With new customers growing between 2 and 3 per cent a quarter, and 7% of existing customers upgrading to join the more-than-$100k in services club, Workiva has quite a lot of revenue potential in front of them. Considering that their product is based on simplifying filings with governments around the world, and governments have never been known to simplify reporting, my guess is that the need for this type of business is going to grow.
Looking at cash, there’s currently $320 million sitting on the balance sheet with a spend of about $60 million per quarter which gives them about 5 quarters of expenses without raising any more money. After they went public, Workiva financed operations with convertible debts at very favorable rates, and my guess is they’ll probably go back to the debt markets if the current growth keeps up. Assuming everything stays relatively constant, it looks like they’ll break even within a few years, and if times get tough, they could always dial back sales and marketing, with plenty of room for organic growth just with existing customers. International, which currently accounts for 8% of revenue, also looks promising with expansion plans in EMEA and APAC.
Given all of this, Tidal River is going to take a position in Workiva this week, even if it’s a little pricey right now, in the hope that it will grow into its current valuation. If the stock pulls back significantly, Tidal River will probably just pick up more shares to increase its position, assuming the fundamentals and hypothesis in the spreadsheet linked in the show notes doesn’t significantly change.
If you like the podcast and want to see more content like this get created feel free to subscribe on your favorite podcast app, or buy a photo from https://tidalriverinvestments.com - money earned on the photos gets deposited in the investment account. As always Tidal River Investments and I are not financial advisors, market analysts, or otherwise in any way offering advice for or against any of the securities discussed - meet with a financial advisor for that information. Stocks and funds may not be good investments for you, depending on your financial situation.
We’re here for learning, not advice, and I wish you the best on your financial journey, and remember, tides fluctuate!