Special Purpose Acquisition Companies (SPACs) and Initial Public Offerings (IPOs) have been popular this year, but there are still over 400 PSPCs that have yet to announce a merger target. Along with the IPO boom over the past two years – 565 and more transactions since the start of 2020 – the increase in the number of new listings has led to an increasing number of companies having to constantly report financial data and other forms to the SEC.
Workiva (NYSE: WK) specializes in helping businesses report and maintain compliance. As a market leader, it could be the main company to turn to for listed entities. If Workiva can capitalize on the current surge in market activity, shareholders will benefit immensely in the future.
The trust tool for teamwork
Workiva’s software enables organizations to work more efficiently when compiling often lengthy, time-consuming and error-prone reports. It is essential that the numbers be accurate and consistent across an entire annual record of 10,000, for example, which may have dozens of contributors working on it at the same time. Workiva’s platform enables collaboration between teams by bringing together data and documentation on a single platform.
Its solutions offer financial reports for more than 350 types of SEC filings, as well as IPO documents, ESG reports and XRBL reports, which are becoming increasingly popular due to their transparency and accessibility. The company is also able to help users comply with regulations in the UK and South Africa. This broad offering has probably helped Workiva to be named a leader among compliance platforms, according to the research firm Forrester.
The winning methods of Workiva
Workiva’s solutions have been adopted by large public companies such as Snowflake and Kinder Morgan, while only having a 4% churn rate in the second quarter. Over the same period, its net revenue retention rate was 111.6%, while its total customer base increased 12.4% year-over-year. The number of large customers (those who spend more than $ 150,000 per year with the business) increased 46% to 500.
Second-quarter revenue increased 26% year-over-year to $ 105.6 million, and gross margin increased more than three percentage points to 76.7%. This is mainly due to strong subscription revenues, which grew 29%, while professional services only grew 9%. More and more businesses are turning to the cloud to stay in compliance.
While the company still reports a net loss – $ 9.5 million last quarter – its bottom line is moving in the right direction. Its net loss margin improved from minus 23% in the previous year period to just 9%. And Workiva can subsidize those losses with the $ 552 million in cash and investments on its balance sheet, as well as the $ 12 million in free cash flow it generated during the quarter.
Lots of opportunities yet to come
During Workiva’s second quarter earnings call, CEO Marty Vanderploeg gave credit to the popular IPO and PSPC market for contributing to the strong performance of the company. At the start of August, 250 companies went public in 2021, already exceeding last year’s annual total. With the rise of the IPO market, Workiva should continue to benefit from this tailwind. The company also has ambitious international expansion goals – only 8% of revenue came from outside the United States in 2020 – and given that many international companies struggle with the same issues as American companies, Workiva operates mature markets around the world.
However, investors should note that this stock is valued at 17 times forward sales estimates, a very expensive valuation for a company that is expected to grow sales by just 23% this year. However, it trades at a cheaper multiple than competitors like Service now – which trades at 23 times sales. Workiva’s leadership position should make it a safer game than a newcomer to the market, but if the IPO and PSPC craze dies down, the company’s growth prospects will suffer. .
This risk, while important for investors to consider, would disrupt the entire market, and the company’s leadership position and subscription-based model would also provide some stability. As companies rush to join government markets through SPAC and IPO transactions, Workiva is one of the best companies to benefit from this trend, making it a worthy addition to your watchlist.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.