SurveyMonkey's Valuation Looks Too High Considering Its Growth Rates

SurveyMonkey's strong IPO is very much a sign of the times.

After rising 43.7% on its first trading day to $17.24, the online survey software provider is worth about $2.5 billion, once stock options and restricted stock units (RSUs) are accounted for. That translates into a valuation of more than 11 times SurveyMonkey's 2017 revenue, and perhaps around 10 times its likely 2018 revenue.

SurveyMonkey is hardly the only cloud/SaaS software provider to be granted such lofty multiples. From ServiceNow (NOW) to Zendesk (ZEN) to AppFolio (APPF) to Smartsheet (SMAR) , there's no shortage of richly-valued names in this space following strong 2018 run-ups.

However, whereas most of these firms are posting revenue growth rates that are soundly above 20%, SurveyMonkey's sales growth is more subdued. Its revenue rose 6% annually in 2017 to $218.8 million, and -- with the help of stronger average revenue per user (ARPU) growth -- 14% during the first six months of 2018 to $121.2 million.

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It's worth remembering here that SurveyMonkey isn't exactly a spring chicken: The company was founded in 1999 during the Dot.com bubble, and has gradually built up a base of more than 16 million active users and 616,000 paying users. Along the way, it has been competing against Alphabet/Google (GOOGL) , which offers both its Google Surveys product for businesses and a survey-creation app (known as Google Forms) through the G Suite, as well as independent online survey firms and providers of enterprise market research/feedback software.

As both user reviews and professional reviews drive home, SurveyMonkey has plenty of fans. Its paid survey-creation offerings, which include individual and team plans as well as an Enterprise solution, generally get high marks for their flexibility, ease-of-use and analytics/reporting tools.

The company's product line also includes "purpose-built solutions" that do things such as poll parts of SurveyMonkey's global audience, track employee sentiment and collect data and payments from forms. Like many SaaS peers, SurveyMonkey has also built a healthy ecosystem of third-party business apps and services that its platform integrates with. And it has more recently created a tool (known as SurveyMonkey Genius) that uses machine learning to provide recommendations to survey-builders.

As its recent pickup in ARPU growth -- primarily attributed to price hikes carried out for individual plans in Q2 2017 -- demonstrates, SurveyMonkey has created a measure of pricing power for its paid offerings. And going forward, the company's Enterprise plans and "purpose-built" offerings provide a path for both expanding its paid corporate base and growing ARPU, given that much of its paid enterprise base consists of users on individual plans rather than an "organization-level agreement."

However, it's hard to ignore the fact that SurveyMonkey's paid user count rose only 5% in 2017, and was up just 3% annually as of June 30th. Or that nearly two decades after being founded, less than 4% of SurveyMonkey's active users are counted as paid users. Clearly, a mature core market and competition (particularly from Google) are holding back growth.

Moreover, in spite of its age, SurveyMonkey produced GAAP net losses in both 2016 and 2017 (in 2017, its lost $24 million), and is for now generating just a modest amount of free cash flow (FCF). FCF totaled $5.6 million in 2017 and $11.8 million during the first six months of 2018. While 2016 layoffs improved the company's cost structure, its sales/marketing and R&D spend both remain substantial.

Nonetheless, following its big IPO-day gains, SurveyMonkey carries sales multiples that one would normally associate with faster-growing companies. Chalk that up to the fact that markets are currently in love with with all things SaaS-related, and -- at a time when they've often given a cold shoulder to tech names that have a measure of business risk attached -- have been quite eager to bid up shares of software firms seen as "safe" bets to keep growing.

SurveyMonkey arguably qualifies as one of those safe bets, given how well-established the firm is and the enterprise opportunities it has available to it. However, given that its growth rates are well below those of many SaaS peers, investors who like the company's story might want to wait for a better entry point.

At the time of publication, Action Alerts PLUS, which Jim Cramer co-manages as a charitable trust, was long GOOGL.

This column originally appeared on Real Money, our premium site for active traders. Click here to get more great columns like this.

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