New Relic Inc (NYSE:NEWR) runs a cloud-based software analytics platform that lets companies track usage and other valuable data. It has partnerships with the likes of Amazon Web Services, IBM Bluemix, and Joyent. The company had a turbulent 2020 by getting involved in both the pandemic and Black Lives Matter protests.
CEO Lew Cirne is known as a coder’s CEO, spending at least two days per week writing code for his own projects. Leadership is much the same, but that didn’t guarantee success for its latest New Relic One platform. COO Michael Christenson then stepped down to allow chief product officer and New Relic One designer Bill Staples to take his place.
Staples and Cirne are hoping to create growth opportunities for investors through the 2020s. But Cirne also created headlines for his pro-Trump, anti-BLM donations and sentiments to employees. Being based in Portland, Oregon, New Relic’s engineering staff felt stigmatized during a summer of widespread protests.
Can New Relic foster a culture of unity while getting itself back on track or will it be DDoSed and blue-screened itself? In other words, is New Relic stock a buy?
New Relic Patents Are Critical To Its Valuation
Cirne is a Canadian tech entrepreneur who worked for Apple (AAPL) as a software engineer at the start of his career. He then started Willy Technology, which he sold for $375 million to start new Relic, which is an anagram of his name.
He headquartered the company in San Francisco, California and expanded with offices in the Pacific Northwest. It houses nearly two dozen technology patents held by Cirne, and these patents form the foundation of the company’s value.
They form a suite of products, including the New Relic and New Relic One platforms. In addition to the software, the company offers Application Performance Management and consultation services. It long charged users per data report run, which helps minimize bandwidth costs while maintaining lower overhead.
It changed the pricing model in the summer of 2020 to charge by user, hoping to take advantage of the social distancing age. The world moved toward a cloud-based infrastructure, which pushed apps like Zoom (ZM) to the forefront.
However, some industry analysts worry about New Relic’s lack of growth in an economy built for it. Giants like Microsoft (MSFT), Apple (AAPL), Alphabet (GOOG), Salesforce (CRM), SAP, and others do their best to fully integrate any data management tools. This makes bears wonder if the stock is a solid buy.
Is New Relic Stock A Buy?
New Relic Inc had a market capitalization around $4.8 billion at the start of 2021. Its share prices dropped to a 52-week low of $33.49 alongside the rest of the market in 2020. Although it quickly recovered to prior trading levels, the summer protests and lack of income destabilized the price.
Investors went on a roller coaster ride while most technology plays soared during the widespread quarantines. The company posted losses in each quarter of 2020. It lost $0.37 per share in each of the first two quarters of the year, followed by a whopping $0.68 per share loss in the third quarter.
On a positive note, fiscal year 2020 revenue (which ended May 2020) showed 25 percent year-over-year revenue increase to $600 million.
It also reported $636 million in annual recurring revenue, thanks to its software-as-a-service business model.
Of course, this isn’t the first time New Relic stock crashed. It lost over a third of its market value (approximately $1.5 billion) in 2019 after failing to meet investor expectations.
Cirne hopes to reach $1 billion in revenue in 2021, but that’s going to be a difficult level to reach without strong partnerships.
The company’s net loss of $90.98 million shows it spent heavily to grow its top line; it’s a bet on future earnings. It ended the fiscal year with $298 million in cash and cash equivalents. That liquidity may be needed to stay competitive as tech giants buy up smaller components to strengthen their arsenals.
New Relic investors face several risks in the coming years.
New Relic Earnings Hurt Share Price
Although its technology is arguably solid, New Relic One failed to gain the adoption and growth investors expected.
Businesses went virtual using tools from WordPress and Shopify to Trello, Telegram, Microsoft Azure, Amazon Web Services, and more.
COVID-19 sparked a rush to technology, and dozens of technology companies had sales forces ready to serve. Salesforce and Zoom had record high years, alongside most of the technology sector, but New Relic continued to flail. This is the risk you take when investing in solid tech with weaker marketing.
On top of this, the company faced down an internal employee revolt for much of 2020. Its Portland-based engineering team disagreed with Cirne’s line in the stand regarding ongoing BLM protests through the summer of 2020.
Staff spoke to journalists to give a negative outlook on the company culture. And it gained steam because it lacks the PR reach and acument of a company like Apple.
New Relic Competitors Pose A Serious Threat
Despite its patents, New Relic is literally a new relic in the tech industry. Its competition includes AWS, Google, Splunk (SPLK), Broadcom (AVGO), Microsoft (MSFT), IBM (IBM), Cisco (CSCO), and more. Everyone from Shopify to Salesforce (CRM) works to integrate with proprietary services to track all the necessary data.
Selling to business customers already working with other vendors severely bottlenecks New Relic’s growth potential. If it wants to return its growth stock glory days, it needs to convince business users that it is better than the stack of existing solutions, along with the stampede of blockchain solutions coming down the pipeline.
Is New Relic Stock A Buy? The Bottom Line
New Relic is a cloud-based software company that generates revenue from an SaaS business model. It holds over a dozen technology patents and provides deep analytics and statistics for backend business reporting. This put it in the perfect position to skyrocket alongside other technology sector companies that thrived.
Except it didn’t – instead it reported stunted growth, continued losses, and internal employee strife. If the company can’t work its issues out, it may be better off seeking an exit strategy through a buyout from a bigger tech company.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.