Sumo Logic, Inc. (SUMO) in Redwood City, Calif., is a pioneer in continuous intelligence, a new category of software that enables organizations of all sizes to address data challenges and opportunities amid ongoing rapid digitalization. Last month, the company was named the Independent Software Vendor (ISV) Partner of the Year for 2021 by Amazon Web Services. Also, it announced the availability of its continuous intelligence platform on Red Hat Marketplace on September 8, in collaboration with International Business Machines Corporation (IBM).

After hitting its 52-week price low of $12.90 on December 6, 2021, SUMO’s shares surged to hit a $16.44 peak on December 8 because its third-quarter financials exceeded analysts’ expectations. However, the stock has since plunged in price. It has lost 51.9% year-to-date and 18.7% over the past month to close yesterday’s trading session at $13.78. 

SUMO also faces intense competition from other players in the software space, such as Splunk Inc. (SPLK) and Datadog, Inc. (DDOG). So, SUMO’s near-term prospects look bleak.

Here is what could shape SUMO’s performance in the near term:

Top Line Growth Does Not Translate into Bottom Line Improvement

SUMO’s revenue increased 19.6% year-over-year to $62.02 million for its fiscal third quarter, ended October 31, 2021, driven by the continuing adoption of its leading continuous intelligence platform. However, its non-GAAP gross margin came in at 73% compared to 77% in the prior-year quarter. Its non-GAAP net loss increased 306.8% year-over-year to $13.33 million. Also, its non-GAAP loss per share came in at $0.12, representing a 100% year-over-year rise.

Unimpressive Management Guidance

SUMO expects its total revenue to be between $63.70 million - $64.70 million in the fourth quarter and $238.80 million - $239.80 million in its fiscal year 2022. However, for the fourth quarter, its non-GAAP operating loss is likely to be between $15.90 million - $15.40 million and its non-GAAP loss per share to be  roughly $0.17. In addition, its non-GAAP loss per share is expected to be between $0.51 - $0.50 in fiscal 2022. Also, the company recently stated in its Form 10-Q that “We have a history of net losses, and we may not be able to achieve or maintain profitability in the future.”

Poor Profitability

In terms of trailing-12-month EBITDA margin, SUMO’s negative 44.89% is lower than the 14.42% industry average. And its trailing-12-month net income margin is negative compared to the 6.40% industry average. Furthermore, its negative respective trailing-12-month ROCE, ROTC, and ROTA compare to the 8.29%, 4.97%, and 3.62% industry averages.

POWR Ratings Reflect Bleak Prospects

SUMO has an overall rating of D which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight dissimilar categories. SUMO has a C grade for Value, which is in sync with its 4.95x forward EV/S. which is 19.8% higher than the 4.13x industry average.

The stock has a D grade for Quality, consistent with its lower-than-industry profitability ratios.

SUMO has a D grade for Sentiment. This is in sync with analysts’ expectations that its EPS will decrease 128.6% for the current quarter, ending January 31, 2022, and remain negative in fiscal 2022 and 2023.

Beyond what I have stated above, we have given the stock grades for Growth, Momentum, and Stability. Click here to get all of SUMO’s ratings.

SUMO is ranked #136 out of 168 stocks in the Software – Application industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

Small-cap company SUMO has been delivering consistent product and services innovations. However, stiff competition in the growing software space threatens the company’s market dominance. And  the company is expected to remain unprofitable in the near term. So, we think it could be wise to avoid the stock now.

How Does Sumo Logic (SUMO) Stack Up Against its Peers?

While SUMO has an overall POWR Rating of D, one might want to consider investing in Software - Application stocks having an A (Strong Buy) rating, such as Commvault Systems, Inc. (CVLT), Open Text Corporation (OTEX), and Oracle Corporation (ORCL).

SUMO shares fell $0.12 (-0.87%) in premarket trading Tuesday. Year-to-date, SUMO has declined -52.76%, versus a 25.72% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

More...