Daily Stock Pick: November 17th, 2021

Trading was muted this morning as investors digested fresh economic data and company earnings from major retailers.  Yesterday the Commerce Department reported that retail sales rose 1.7% in October, indicating that U.S. consumers are ramping up spending despite rising prices.  The major indices ticked upward in the previous session.  Let’s see what today will bring.  

This morning we’re featuring a mighty mid-cap that’s demonstrating traction amid significant changes in the company’s business model and management.  While the shifts are just starting to take effect, the results have been very encouraging.  A recent positive revision to the company’s 2022 outlook could point to more big changes on the horizon.   

San Francisco-based software analytics company New Relic, Inc. (NEWR) offers application development, production monitoring, real-time analytics, mobile application management, and digital transformation solutions.  Its offerings include new relic APM, new relic mobile, new relic insights, new relic services, a new relic browser, and new relic platform.

Under the guidance of founder and CEO of Lew Cirne, New Relic (an anagram of his name) helped introduce the concept of application monitoring to a generation of developers building web and mobile apps.  Investors seemed skeptical in July of this year, when Cirne stepped down, leaving the role to long-time Microsoft (MSFT) veteran Bill Staples, but the shift seems to be paying off as changes Staples made to New Relic’s business model take effect.  

The company switched to a consumption-based business model that charges customers based on the number of employees using New Relic software.  Previously, New Relic licensed its software through traditional subscription contracts.  “Our move to a consumption model puts our customers at the center of every function in the company. This transformation isn’t easy, and it won’t be completed quickly because we are asking our customers, our employees, and our shareholders to participate in a journey where the destination is clear, but the path to get there isn’t,” Cirne told investors in February when the changes were announced.  The shift aims to derive 80% of its revenue from consumers in the 2022 fiscal year in a bid to return revenue growth to rates seen in the overall market.

The track record since the new model speaks for itself.  Over the past two quarters, NEWR has exceeded expectations on the top and bottom lines.  Earlier this month, the company reported revenues of $196 million for the second quarter of its 2022 fiscal year, blowing past expectations for $182.2 million.  NEWR also reported an adjusted loss of 10 cents a share, while analysts had expected 13 cents.  The company ended the quarter with 14,300 active paying customers, with customers paying more than $100,000, exceeding 80% of total paying customers for the first time, said CFO Mark Sachleben.

J.P. Morgan analyst Sterling Auty double upgraded NEWR from Underweight to Overweight and raised his target for the stock price to $150 from $70.  Citing the “far better than expected” earnings.

“This was a big change for the positive this quarter as the business model switch, management changes, and operational moves have now shown two straight quarters of material improvement and has the company pointed on growth acceleration back toward industry levels,” Auty wrote in a note.

New Relic also adjusted its fiscal-year outlook, raising its forecast for revenues to between $778 million and $782 million, up from $730 million to $735 million previously.

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