Freshly public hypergrowth data software company Sumo Logic (NASDAQ:SUMO) just released its first earnings report as a public company. Wall Street was not impressed, sending SUMO stock down near 19% after the Q3 print.
This is nothing more than a near-term correction in a long-term winner.
In the big picture, SumoLogic is emerging as a mission-critical enterprise software component of the Intelligence Economy revolution.
The company’s third-quarter numbers and fourth quarter guide — which broadly smashed expectations and included big revenue growth and substantial profit margin expansion — underscored that this “big picture bull thesis” on SUMO stock remains alive and well.
Why, then, is SUMO stock selling off?
Because the stock sprinted higher into the print. In the days leading up to the Q3 report, SUMO stock surged as much as 30%. Thus, we just have some near-term “buy the rumor, sell the news” dynamics at play here.
These dynamics will pass. And soon. When they do, SUMO stock will find its footing, and proceed on its longer-term march higher — so buy the dip.
Here’s a deeper look.
SumoLogic Is a Long-Term Winner
Zooming out, SUMO stock is a long-term winner that deserves to be in any and all growth stock portfolios.
The bull thesis is pretty simple.
We are sprinting into the Intelligence Economy — a new era wherein companies and persons become smarter with the help of data, AI and algorithms. This future is inevitable, because (somewhat obviously) AI-powered and data-driven decision making leads to better outcomes. A 2020 Forrester Consulting Survey found that data-driven organizations are 58% more likely to beat revenue goals than their non-data counterparts.
By consequence, the Intelligence Economy will one day be ubiquitous. Yet, only 31% of companies today consider themselves data-driven, while 92% of companies are increasing their pace of investment in AI and big data.
Thus, the stage is set for explosive growth in the Intelligence Economy over the next 5 to 10 years.
SumoLogic is emerging as a mission-critical enterprise software component of this explosive revolution.
The company has created a robust, end-to-end enterprise software platform which aggregates and unifies all of a company’s machine data into one place, so that the data can be easily monitored, transferred, edited, and analyzed. It’s essentially one foundational data hub with many value-additive applications across the enterprise.
For example, Nintendo (OTCMKTS:NTDOY) uses Sumo Logic to programmatically track cybersecurity data and identify cybersecurity threats. Netflix (NASDAQ:NFLX) uses Sumo Logic to aggregate, track, and manage incident report data, and ultimately optimize the consumer experience. Ulta (NASDAQ:ULTA) uses Sumo Logic to improve back-end operations and product assortment.
Sumo Logic has truly created a one-to-many data analytics platform that has ubiquitous appeal and infinite applications.
To that end, as the Intelligence Economy comes into its own over the next few years, Sumo Logic will experience explosive growth — and SUMO stock will charger higher.
Q3 Numbers Were Good
Sumo Logic’s third quarter earnings report broadly underscored that this company is only gaining momentum in the Intelligence Economy revolution.
Third quarter revenues topped expectations, and rose 28% year-over-year — a very impressive mark considering we are still in the midst of a pandemic which has “leaned up” enterprise spending. Management also guided for Q4 revenues to come in above expectations, and rise more than 20% year-over-year.
Meanwhile, margins are tracking in the right direction, which is very important because it shows that this hyperscalable software company will benefit in a big way from economies of scale over the next few years. Basically, so long as revenues keep charging higher, profit margins will, too, providing a double boost for profits.
Gross margins rose four points in the quarter to 77%. Year-to-date, gross margins are up one point. More impressively, operating margins improved 37 points year-over-year in Q3 to just -4% — bringing net loss dollars close to the flatline.
All in all, Sumo Logic’s third quarter earnings report was very good. SUMO stock is just dropping because it got overheated heading into the report. So let these near-term “buy the rumor, sell the news” dynamics play out, and be ready to buy the dip once the dust settles.
Buy the Dip in SumoLogic Stock
For a moment, forget the earnings report. Instead, let’s look at the big picture here.
SumoLogic is emerging as a mission-critical component of the Intelligence Economy revolution. Broadly, that means that SumoLogic is going to increasingly cut out a bigger share for itself in the $3.8 trillion global IT spending pie.
As that happens, Sumo Logic has visibility to turning into a multi-billion-dollar revenue company, with ~80% gross margins and a hyperscalable business model that will those billions of dollars of revenue into hundreds of millions of dollars in profits.
Despite all that, the SUMO stock price today puts the company’s market capitalization at just $2.5 billion.
That’s a steal. That’s an absolute steal, for a hypergrowth Big Data company with as much upside potential as SumoLogic.
Bottom Line on SUMO Stock
SUMO stock is a long-term winner. This earnings plunge is a near-term selloff. Usually, near-term selloffs in long-term winners are great buying opportunities.
This is no exception.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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