SUMO Drops -6.3%. Let's Take a Closer Look at its Valuation.

Software company Sumo Logic is standing out today, droping to $8.35 and marking a -6.3% change. In comparison the S&P 500 moved only -2.4%. SUMO is -25.51% below its average analyst target price of $11.21, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Sumo Logic has underperfomed the S&P 500 by -20.6%, moving -35.0%.

Sumo Logic, Inc. provides cloud-native software-as-a-service platform that enables organizations to address the challenges and opportunities presented by digital transformation, modern applications, and cloud computing worldwide. The company is part of the technology sector, whose combine explosive growth potential with high valuations and high volatility. Investors are often willing to overlook the risks and inflated valuations of the sector because of this promise of future growth potential.

Sumo Logic does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-0.32 and $-1.18. We can see that SUMO has a forward P/E ratio of -26.1 and a trailing P/E ratio of -7.1.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US technology companies is 26.5, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To better understand the strength of Sumo Logic's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($) Operating Expenses ($) Operating Margins (%) YoY Growth (%)
2022-01-31 242,125,000 356,859,000 -47.39 -23.67
2021-01-31 202,637,000 280,296,000 -38.32 29.1
2020-01-31 155,056,000 238,862,000 -54.05 -16.29
2019-01-31 103,642,000 151,815,000 -46.48 n/a
  • Average operating margins: -46.6 %
  • Average operating margins growth rate: -3.6 %
  • Coefficient of variability (lower numbers indicate less volatility): 13.8 %

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Sumo Logic's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2022-01-31 -30,491,000 -2,258,000 -32,749,000 32.22
2021-01-31 -47,179,000 -1,138,000 -48,317,000 4.58
2020-01-31 -48,569,000 -2,068,000 -50,637,000 -124.12
2019-01-31 -22,127,000 -467,000 -22,594,000 n/a
  • Average free cash flow: $-38,574,250.00
  • Average free cash flown growth rate: -29.1 %
  • Coefficient of variability (the lower the better): 34.4 %

If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for SUMO, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Sumo Logic has a P/B ratio of 2.6. This indicates that the market value of the company exceeds its book value by a factor of more than 2, but is still below the average P/B ratio of the Technology sector, which stood at 5.57 as of the third quarter of 2022.

With a negative P/E ratio, a lower P/B ratio than the sector average, and a regular stream of negative cash flows with a downwards trend, we can conclude that Sumo Logic is probably overvalued at current prices. The stock presents poor growth indicators because of its consistently poor operating margins with a negative growth rate, and no published PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.