Qualtrics: great product, high price (NASDAQ: XM)

Andrei Popov

Investment thesis

Qualtrics (NASDAQ:XM) has an excellent product and an excellent reputation in a large and growing market. Nonetheless, its stock-based compensation plan, high valuation, and doubts about sustaining its previous growth levels make it a “hold” for me.

Introducing Qualtrics

Qualtrics offers an Experience Management (XM) platform to manage customer, employee, brand, and product experiences. The company was founded in 2002 and acquired by SAP in 2019. In July 2020, SAP announced plans to take Qualtrics public and the company began trading on Nasdaq on January 28, 2021.

Chart
Data by YCharts

The stock has had a rather difficult last 12 months. In the next section, we see that this could be partly attributed to widening losses.

Regarding Qualtrics, in this article I will analyze:

  • Its historical performance
  • Factors impacting future potential
  • Global statistics compared
  • My general take on Qualtrics

Historical performance

Growth (year over year)

Dec-19

December 20

December 21

last 4 quarters

Revenue 47.09% 29.16% 40.88% 31.11%
Gross profit 35.59% 39.29% 39.88% 27.35%
General and administrative costs 334.58% -47.54% 148.26% 64.75%
R&D expenses 267.27% -12.11% 52.33% 47.80%
Net revenue -2600.85% -72.96% -288.67% -104.37%

Source: Alpha Research

Margins (% of revenue)

Dec-19

December 20

December 21

last 4 quarters

Gross profit 68.62% 74.00% 73.48% 72.48%
General and administrative costs 195.83% 79.54% 140.16% 137.97%
R&D expenses 40.96% 27.87% 30.14% 31.33%
Net revenue -170.45% -35.69% -98.46% -98.20%
Free movement of capital -68% -66% -9% -1%

Source: Alpha Research

The historical performance charts show that the historical revenue and gross profit growth looks very strong. However, R&D and SG&A spending are both growing at a significantly higher rate. The margins show that while the gross margin is excellent, the combined expenses are much higher than the revenue, leading to extremely high losses. Cash consumption has decreased in more recent periods.

Stock-based compensation

Qualtrics’ latest annual report says high operating expenses are tied to high equity compensation, which isn’t necessarily unusual at high-growth, loss-making tech companies. While such stock-based compensation may improve long-term productivity and employee and management satisfaction, it could certainly increase stock dilution, which is a disadvantage for shareholders. Although stock-based compensation does not have a direct impact on cash flow, in the latest earnings call management boasts of improved and positive operating cash flow. However, they do not mention the degree of stock dilution that stock-based compensation will cause. The specific method of stock-based compensation used by Qualtrics is called Restricted Stock Unit (RSU). A Restricted Stock Unit is an award that is valued in terms of company stock but is not issued at the time of award. The company distributes shares, or the cash equivalent of the number of shares used to value the unit, once the recipient of a unit has met the vesting criterion.

Overview of Qualtrics Restricted Stock Units

Overview of Restricted Share Units (Qualtrics Annual Report)

In the overview above, it can be seen that there are 82 million permanent restricted units outstanding as of December 31, 2021. As of December 31, 2021, Qualtrics had 570 million shares outstanding. Hypothetically, if all permanent restricted units were to be activated now, this would result in a 14.4% increase in shares outstanding (dilution). Alternatively, the company could pay a cash equivalent.

Great market opportunity

Experience management is the business discipline that helps organizations connect with their customers and employees. A PwC report indicates that more and more clients are prioritizing their experience and demanding more from the experience. I can only imagine it’s the same for employees. Despite this, most companies are not able to manage the experience well enough. Thus, the experience management market opportunity is enormous and is found in all companies, in all sectors, in all countries. Experience platforms offer a solution to these problems.

Amazing product

The Qualtrics XM Platform is its primary software platform, enabling the design and continuous improvement of the four core experiences of any organization: customer, employee, product and brand. Qualtrics enables the management of all four experiences on a single, integrated platform:

• CustomerXM — reduce churn, drive engagement, and increase lifetime customer value (LTV) by listening to customers across all channels and acting on their contribution.

• EmployeeXM – drive employee retention, engagement, and productivity by continually listening to employees and delivering enhanced work experiences.

• ProductXM — create products people want, save time to market, and improve share of wallet by identifying and acting on user wants and expectations.

• BrandXM — build a loyal subscriber base, acquire new customers and increase your market share by ensuring your brand resonates at every critical touchpoint and attracts target buyers.

Unlike some other experience services on the market, Qualtrics does more than collect post-transaction data to track satisfaction patterns. Instead, its XM operating system is a single, secure, cloud-native platform that enables organizations to gather all their structured and unstructured experience data, analyze it with advanced native analytics powered by AI and take real-time action to continually improve the experiences they provide for customers, employees, products and the brand.

With the acquisition of Clarabridge in 2021, Qualtrics has strengthened its ability to help companies discover what their customers and employees are saying, wherever they say it, including social media, emails, phone calls, and more. support, chats and product reviews.

market leader

Due to the quality of its products, the Qualtrics XM platform is trusted by more than 16,750 customers, including 89% of the Fortune 100, according to its latest annual report. Moreover, the company wins many awards for its platform and gets high reviews on review websites.

Nevertheless, there are also other respected companies in the experience management market, such as Medallia and Momentive Global (MNTV), that own SurveyMonkey. Although Momentive focuses more on small businesses, it also tries to enter the enterprise market. Additionally, Medallia is performing well in the enterprise segment. While Qualtrics is the leader in the enterprise market, these players are always ones to watch.

Another concern I have is that its historically high growth rates may decline in coming years as there are fewer potential companies left to acquire in the United States.

According to its latest earnings call, Qualtrics is investing heavily to gain exposure in countries other than the United States. However, this comes with some risk as new markets require different demands and they will have to compete with different companies.

Overall, there are great opportunities in the market and Qualtrics has the product to take advantage of them. However, it will be difficult to maintain its past growth rates.

Global statistics compared

I calculated several basic stats from Qualtrics. As a benchmark, I used Momentive Global.

Price/Sales Price/gross profit Revenue growth (3 years) Gross margin Net profit margin
Qualtrics 6.66 9.19 38.84 72.30% -98%
Global momentum 3.08 3.69 8:39 p.m. 83.50% -28%

Source: Alpha Research

First of all, I would like to make a remark concerning the ratios of sale price and price of gross profit. These ratios are calculated without taking into account the unvested shares (from the equity compensation plan) that I referred to earlier. For Momentive Global, the impact of their unvested shares is pretty close to zero, as they don’t have a lot of them right now. However, as noted earlier, for Qualtrics, their unvested shares could impose severe dilution. Hypothetically, if all of them were to be activated (14% of total shares outstanding), this would lead to a price-to-sales and price-to-gross ratio of 7.7 and 10.8 respectively.

With or without the potential future dilution, Qualtrics is very expensive compared to Momentive Global when it comes to price-to-sales ratio. Also, since Momentive has a higher gross margin, according to the gross profit price, Qualtrics is even more expensive. Moreover, due to its high operating expenses, its losses are much higher than for Momentive Global. On the other hand, Qualtrics has had an extremely high historical revenue growth rate.

If Qualtrics could significantly reduce its equity compensation, it would approach Momentive’s net income margin. Nevertheless, it would not make a difference for the valuation of price versus sales and price versus gross margin.

My general take on Qualtrics

The experience market is very large and vast and it only seems to be growing in the future. Qualtrics seems to be a very respected player in the market with a great product. This has historically resulted in a very high level of revenue growth. However, this comes with a higher price, according to valuation multiples. Time will tell if the geographic expansion will be successful, while revenue growth at its US businesses may slow down a bit. In addition, very high stock-based compensation could result in high stock dilution or large cash outflows. With these negatives in mind, I wouldn’t pay the high valuation, especially since players like Momentive Global and other high-growth players in the global stock market can be found for much less. The stock price needs to drop more for me to consider buying it.

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