Why Model N Stocks Aren’t Hypergrowth Tech Buys Yet (NYSE:MODN)

After Model N (New York Stock Exchange: MODN) joined the top three growth stocks with strong quant-rated buys, with shares trading at around $41. Two things brought his MODN stock down sharply. Stocks fell after an accelerated Nasdaq (QQQ).) sales in just a few trading sessions. Additionally, his Q1 2023 sales and guidance for Model N failed to impress the market.

Quant scores for MODN stocks have remained largely unchanged. Only the Profitability Score has dropped from B- three months ago to C+ now.

Momentum, a quantitative measure of a stock’s technical direction, weakened after the decline. With Model N trading at low levels, should investors buy into Model N’s leadership in cloud-based revenue management solutions for life sciences and high tech?

About Model N

Model N managed $500 billion annually.Customers achieve 99.95% (virtually 100%) availability Its integrated cloud solution. The “N” in the company name stands for “Model Next”, like “Next Big Thing”.

Stocks aren’t trading like the next big thing. Stocks are at risk of trading below prices not seen since October 2022. Tech investors and speculators are hooked on his ChatGPT instead. During the stock market rally in January, the company’s stock price rises when mentioning artificial intelligence.

Model N is a stable revenue stream. 75% of total revenue comes from subscriptions. It accounts for $44.2 million of the reported $59.2 million. In Q1 2023, the company’s revenue grew 14.8% year-on-year, exceeding expectations. Second quarter revenues of $59 million to $60 million exceeded consensus revenue projections.

The company reported earnings per share on a non-GAAP basis. Readers should always review the reconciliation of GAAP and non-GAAP results. The company lost $4.05 million. After deducting stock-based compensation expense of $10.4 million, his adjusted EBITDA is $9.1 million.

Increased risk for technology investors to buy companies reporting GAAP losses for equity-based compensation. Coinbase (COIN) and Palantir (PLTR) are two widely-adopted companies that offer executives her SBC.

chance

Model N has moved over 70% of its customers to subscription-based services. A product that has reached its end of life date will no longer receive regulatory support for that product. According to CEO Jason Blessing, 25% to 30% more likely to renew their subscription.

The company has highly regulated customers. Pharmaceutical companies cannot afford to allow their products to stray from their core regulatory and compliance platforms. Investors should expect a shift to SaaS. In his 2023 guidance below, he expects Model N to generate up to $181 million in revenue from subscriptions.

Earnings close to $1.00 per share. This pushes future price/earnings ratios above the sector median and lowers the valuation grade.

Future macroeconomic weakness is unlikely to slow customer migration to subscriptions. Model N didn’t see much weakness in demand last quarter, especially in the life sciences sector. Instead, businesses are coming out of the pandemic. We have to deal with inventory and channel issues.

On slide 8, Model N shows the range of our customer base from SMEs to global corporations.

Investors pay a premium in exchange for a diversified customer base.

Interestingly, Model N cites Moderna (MRNA) choosing Global Tender Management for use in Europe. Moderna, which operated primarily in the United States, recognized the value proposition of Model N products. Its MRNA stock has fallen to a low not seen since November 2022, but service requirements from the Model N remain unchanged.

Winning contracts shows that the Model N platform is not geographically constrained. Additionally, the customer example reminds investors that Model N focuses its customer base on the life sciences market. Software companies serving the life sciences market report steadily increasing revenue growth as recession risks rise significantly in 2023.

dangerous

Market reaction to Model N’s quarterly report is bearish. Chart leaders cannot ignore the potential for continued selling pressure.

A short float of 6.57% is a little high. This is not a slam-dunk bearish win as seen in stocks like his 71% highly shorted stocks like Carvana (CVNA) and his 22.4% Lucid Group (LCID). Still, a short bet on MODN stocks could trigger a short squeeze or further downward pressure.

your takeout

Investors looking for hypergrowth tech companies should add Model N to their watch list. The company has a growth grade of B-. You need to win existing and new customers and bigger deals. If so, consider building a starting position when the stock retests recent lows.