New Relic (NEWR) started off providing analytic and data monitoring software (think application performance management) for DevOps teams, notes value money manager Peter Mantas in his Logos LP Blog.
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The company is now transitioning to add infrastructure and logs through its New Relic One platform. The stock sold off nearly 10% from its last earnings report in early February as analysts are concerned with 2 main things: 1) Growth deceleration due to competitive pressures (Cisco’s AppDynamics, Datadog, and Dynatrace for hybrid environments); and 2) Whether the upsell into New Relic One will bear fruit.
For many, the uncertainty has forced the stock to tumble nearly 50% from 2018 despite very high gross margins, reasonable P/Sales multiple (~6.31x) and strong FCF generation. Investors and analysts are concerned that the stock will remain in a rut for some time and many are considering the stock to be a dog of the mighty enterprise SaaS group or “cloud kings”.
We rate New Relic a buy at these levels for a few reasons. First is the forthcoming exponential growth in application development: Enterprises around the world are going through significant digital transformation over the next decade meaning there will be more cloud or hybrid-cloud deployments, more proprietary software and more third-party applications communicating with one another.
New Relic benefits from the growing need to monitor these deployments, data flows and applications as any downtime creates significant costs to any business.
New Relic’s pure-SaaS play (unlike some of its competitors) puts it in the enviable position to implement quickly, maintain regularly and innovate early in order to meet and learn about the ongoing demands of its customers.
Second, New Relic is transitioning from a one trick pony in the APM market to a full-fledged performance solutions provider for DevOps all under a recurring revenue model.
The monitoring of serverless infrastructure, logs, and applications will all be under their new platform: New Relic One. Recent feedback for the product with some of their largest customers has been very constructive and we believe this will reaccelerate growth into 2025.
Of course, this will have to occur with continued innovation, product tweaks and acquisitions, and their purchase of IOpipe (which provides serverless monitoring) in Q4 of last year is a step in the right direction.
Third, there is still some unknowns as to the potential growth of AIOps, which is DevOps solutions powered by AI. It is expected that AIOps will be one of the fastest growing segments in DevOps, with expected growth rate to be ~30% per annum by 2025.
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Many DevOps teams in the most sophisticated companies already deploy small subsets of AI to assist them in their workflows for certain mission critical tasks: for example, AI is used to recreate an environment during Act of God events like an earthquake hitting the data center.
However, we have yet to scratch the surface of AIOps and we think this will create a large multi-decade tailwind for New Relic as a source for monitoring solutions.
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