While the rest of the technology sector has come roaring back, shares of data business intelligence software provider Sumo Logic (NASDAQ:SUMO) have remained muted. This due to a disappointing fourth-quarter earnings report, which sent SUMO stock plunging to three-month lows this week.
Don’t let that scare you — the dip in SUMO stock is a golden buying opportunity.
Sumo Logic is a great company. That is doing some great things in the overlap of data, artificial intelligence and cybersecurity. The company is still very small, and growing very quickly, with a ton of long-term potential.
All in all, SUMO stock has what it takes to be one of the market’s biggest winners over the next few years.
Don’t let this near-sighted earnings selloff fool you. Take advantage of it. Buy the dip.
Here’s a deeper look.
SUMO Stock: 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 — and, with all the data it has collected and analyzed over the past several years, the company has developed a durable competitive advantage through superior modeling capabilities.
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.
Q4 Numbers Were Good
Although SUMO stock plunged in response, the company’s fourth quarter numbers were actually pretty good.
It was a double beat quarter with healthy growth trends.
Revenues rose 22%. Gross margins expanded seven points. Operating loss margins narrowed by 3 points. Revenues are guided to rise 14% next quarter and 15% next year. Operating loss margin will expand some next year — but only because Covid-19 created a weird dynamic wherein the company’s spending dried up. That spending will come back next year, which will cause some margin erosion. But, more importantly, operating loss margins are expected to be much narrower than where they sat two years ago.
Broadly, everything from customer growth, to revenues, to margins, is trending in the right direction.
The market freaked out because the fiscal 2022 revenue guide came in light. Oh well. Not a big deal. The reality is that Sumo Logic will absolutely crush its fiscal 2022 revenue guide because enterprise software spending on data platforms will surge in over the next 24 months, much more than anyone anticipates.
In other words, this selloff in SUMO stock is unnecessarily short-sighted. Take advantage of it.
Sumo Logic Stock Could Double
My long-term model on Sumo Logic remains unchanged after the Q4 earnings report.
Broadly, I still see Sumo Logic as a company that will grow revenues 10%-plus clip over the next decade thanks to Intelligence Economy tailwinds and Sumo Logic’s durable competitive advantages in this hypergrowth market. I also see gross margins scaling to 80%, and operating margins rising to 30% — both of which are largely consistent with application software companies of this ilk.
Plugging those assumptions into my valuation models, I calculate a 2021 price target for SUMO stock of about $40. That’s nearly double the SUMO stock price today.
Needless to say, buying the dip may be a good idea.
Bottom Line on SUMO Stock
The tech sector meltdown has created multiple golden buying opportunities. SUMO stock is one such opportunity.
But it’s not the best opportunity.
Instead, the best opportunity is in a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.