Qualtrics International (XM) provides a software application to 16,500 companies worldwide to help them build customer loyalty and acquire new customers.
Also, the application encourages the creation of a positive culture in the work environment and helps to create successful products and brands that customers love. I am bullish on XM stock for the following reasons.
The wave of rushes into energy stocks to take advantage of higher hydrocarbon prices fueled by the crisis in Ukraine has kept more than three-quarters of the stock market in negative territory.
The technology sector has been hit hard but still has many quality stocks that will lead to a strong recovery if the market sentiment changes.
Qualtrics International’s divergence from energy stocks is large, as its shares are down almost 25% year-to-date.
However, given the good market prospects, I believe this stock could quickly recoup the loss and continue growing.
Qualtrics Q4 and FY-2021 Results
For the fourth quarter of 2021, Qualtrics International reported a net loss of $0.07, a deterioration from the net loss of $0.02 in the year-ago quarter, while analysts’ median estimate was $0.05 higher.
The company posted another loss despite revenue of $316.04 million, up 48% from the same quarter a year ago, beating the average analyst forecast by $18.4 million.
For all of 2021, total revenue was ~$1.08 billion, up 41% year-over-year.
Despite this growth in annual sales, the income statement ended with another net loss of $0.01 per share, but that was a significant improvement from the net loss of $0.11 per share in 2020.
While Subscription revenue accounted for about 81% of total revenue for the full year, Professional Services and others contributed the remainder.
Comparing Q4 2021 to Q4 2020, the company reported subscription revenue growth of 61%, while comparing Fiscal 2021 to Fiscal 2020, the company reported subscription revenue growth of 51%.
Financial Condition
As of December 30, 2021, the company’s financial position appears to be fairly healthy, with approximately $1.01 billion in cash and cash equivalents far exceeding total debt of $282.2 million, comprising current and long-term lease obligations.
The Altman Z-Score of 5.25 also supports the above stance on Qualtrics’ balance sheet robustness.
For those that may not know, the Altman Z-Score predicts the probability that a company will go bankrupt within a few years. A value more than or equal to 3 indicates that a company is in the “safe zone.” Hence, the probability of business failure is almost zero.
The current ratio of 1.57 could be even better, as generally, it must be a minimum of 2 for operating activities to comfortably generate enough liquidity to meet creditors’ short-term requests.
The company must increase profitability to improve the financial strength of the balance sheet, or the balance sheet could gradually deteriorate.
Evidence of this is that Qualtrics has a return on invested capital of -77.48%, which instead should be positive and higher than the weighted average cost of capital, which is currently 8.56%. Comparing these two metrics shows that any investment is now negative for Qualtrics shareholders, while the capital required to fund the investment certainly comes at a price.
To increase profitability, the company must increase sales and keep costs as low as possible, and it will transform its current value-destroying state into one that creates value as it grows.
However, based on the market outlook and sell-side analysts’ forecasts of the company’s earnings for the coming years, shareholders can look forward to a stronger balance sheet. This should provide enough incentive to expect a strong rally in the share price.
The Market Outlook and Analysts’ Growth Estimates
Globalization increases the profit opportunities for companies exponentially. Since it came into force, there are no longer any limits to the demand that a company can reach. However, to take advantage of these opportunities, companies are focusing on expanding their customer portfolio.
The numbers of a rapidly growing market are a clear sign of this trend.
Customer experience management software is growing rapidly around the world. Its size (estimated at $7.6 billion two years ago) should grow more than 15% per year to about $24 billion through 2027, according to analysts at Allied Market Research.
Following the company’s $1 billion revenue milestone in 2021, growth estimates from sell-side analysts suggest the company should be well-positioned to capitalize on the increasing importance of customer experience management software to business success.
Analysts are forecasting Qualtrics’ earnings to grow at a 30% CAGR over the next five years.
Wall Street’s Take
In the past three months, 13 Wall Street analysts have issued a 12-month price target for XM. The company has a Strong Buy consensus rating based on 10 Buys, three Holds, and zero Sell ratings.
The average Qualtrics International price target is $37.92, implying a 42.7% upside potential.
Valuation and Technicals
Shares are changing hands at $26.6 as of the writing of this article for a market cap of almost $15.5 billion, a P/E ratio of -14.6, and a 52-week range of $22.72 to $49.03.
The stock has a price-book ratio of 7.1, a price-cash flow ratio of 5,522, and a price-free cash flow ratio of -153.1.
The stock price is below the 50-day moving average of $28.98 and trades well below the 200-day moving average of $36.45.
Conclusion
The stock has been down so far this year, but many other tech stocks have also underperformed. The company needs to improve the profitability of its operations, which may give the stock price a strong boost. XM’s market outlook and earnings growth estimates make it possible to anticipate an uptrend in the stock price.
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