Valuation and Other Thoughts

Anaplan is a cloud growth company focusing on allowing companies to better plan and connect by organizing their information via an integrated software solution. Thus far, Anaplan has been growing rapidly, with a YoY revenue growth rate of nearly 37%. That said, the stock is not cheap, trading at a Price to Sales multiple of 17.6. Nearly zero of these cloud growth companies come cheap, however; as the business model is so enticing.

 

From a business model perspective, Anaplan gains a customer and then ingrains its software into everything the organization does; thereby, making it hard to break from. For the duration of the relationship, Anaplan charges a subscription fee which it easy to forecast. And with all subscription plays, analysts and investors usually reward predictable cash flows with higher valuation multiples over those less consistent.

 

With Anaplan, as well as every other young growth cloud play, the key data points to monitor are growth rate and cash pile. As noted earlier, PLAN has a year over year growth rate of 37%, and about $300 million in cash on the balance sheet. PLAN is unprofitable now, and will be for some time as it plows every dollar into growth. And per the cost distribution illustration below, PLAN is investing heavily into its sales and marketing teams to spread the word and capture more and more subscription paying clients. Just last quarter, PLAN plowed 70% of its revenue for the quarter into just Sales and Marketing. This may seem like a lot, but remember, once Anaplan's software is ingrained into a company's operations, it will most likely be a long lasting relationship full of re-occurring subscription revenues.

Anaplan has not been been a public company long (i.e. late 2018), and its stock has had some ups and downs. However, for a more growth oriented investor, this play could see some serious gains in 3-5 years; assuming growth can sustain. Over time, I have followed similar cloud growth names, but missed the boat on becoming an investor before massive stock appreciation. Hopefully, not this time around.

 

My take: Buy, but watch the growth rate. If growth stumbles, take losses and find another winner.

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