Sprinklr: Strong AI Tailwinds And Decent Valuation (NYSE:CXM)

Founded in 2009, Sprinklr (NYSE:CXM) is a US-based company providing cloud multi-channel customer experience (CX) platform. Since its IPO at a price of $20 in 2021, all-time return has been lackluster. Today, the stock trades at merely $12, down -4% over the past year, even after already bouncing back from the 1-year low of $11 in December.

I initiate my coverage with a buy rating. My conservative 1-year price target of $13.6 presents an 11% upside.

Financial Reviews

Fundamentals are generally solid and improving across the board. Having been in the mid-twenties in the past two years, revenue growth has slightly declined, though operating margin has seen expansion. In FY 2024, CXM delivered a revenue of $732 million, an 18% growth. Meanwhile, CXM also saw a breakeven as it delivered a GAAP operating margin of almost $34 million.

The operating margin expansion has been significant for most of FY 2024, which was driven by gradual gross margin improvements and keeping operating expenses flat as % of revenues. Overall, I believe these expansions have demonstrated the management’s disciplined approach towards growth. Moreover, cash generation has relatively been solid, with operating cash flow (OCF) being positive since last year. In FY 2024, OCF even almost tripled YoY, with CXM generating over $71 million of OCF. More or less, it has strengthened CXM’s balance sheet. CXM ended FY 2024 with over $660 million of liquidity with no debt, an exceptionally strong position.

Catalyst

As a company that offers a comprehensive AI-driven CX platform that integrates across different customer touchpoints, I believe there is a very strong case for AI to create value.

Managing information and conversations across various channels is a complex effort, and AI could help synthesize data points to help recommend and even automate actions, effectively resulting in massive productivity gains. I believe that fact alone should put CXM in a very good position to benefit from secular trends in AI in 2024 and beyond.

As of late, AI has continued to be the area of focus for investments for most organizations, as reported by KPMG. In particular, I foresee demand growth for CXM’s solution to be driven by not only the potential efficacy but also the operational cost-saving opportunities in using generative AI for CX. For instance, companies can generate valuable business insights or tailored customer responses faster with AI. Therefore, the catalyst for product adoption remains strong, in my opinion.

CXM has also been improving its platform to capture these opportunities better. As commented by the management, CXM continued to launch relevant AI-driven features that should enhance its value proposition further:

For Sprinklr Social, we launched auto imagine video optimization that reduces publishing failure and optimizes usability. For Sprinklr Insights, we have extensively deployed AI to reduce time to insight. For example, something that would normally take an average of more than four hours to read and understand in graphs and charts and data form now is just simplified with a click of a button to generate insight in human readable form.

Source: Q4 earnings call.

Another thing CXM did well in Q4 that could serve as an indication of future revenue growth was the enterprise client acquisition. Aside from the immediate revenue booked upon executing on the deals, securing key clients help CXM build stronger case studies that will improve its future win rates with new clients. As a company with new technologies such as AI, a solid track record remains an important part of securing large deals, in my opinion. The key clients landed in Q4 should help in that regard:

During the fourth quarter, we continue to add new customers and expand with existing customers. This includes world-class brands like BT, British Telecom where we were selected to be the strategic customer service technology partner. We also added and expanded with brands like AT&T, Canada Goose, IKEA, Sephora and UBS across all our product suite. Major global enterprises are seeking tangible evidence of AI’s efficacy and its potential to drive measurable productivity gains.

Source: Q4 earnings call.

Risk

Risk appears minimal. One key risk factor that I would advise investors to closely monitor would be competition within the CCaaS space. As commented by the management, CXM continues to come across competing solutions by incumbents, such as RingCentral, Five9, Cisco, or Avaya.

Based on my observation, many of these players are also increasingly integrating AI into their offerings to maintain their competitiveness amid the secular AI trends. Moreover, one thing that the CCaaS competitors may have but CXM may not just yet is the deep network of channel partners, which is highly critical in driving seat expansion and implementation. Though indirectly, the CEO may have touched briefly on this issue:

Look, I think we have taken a very pointed approach right now, given that we’ve only been in general availability for a short period. So I can confirm that when we are in a competitive RFP and follow-on process that CCaaS – in the CCaaS market, I can confirm that the win rates are pretty high. But we — it’s not — we’re not able to deploy it everywhere in every market across all teams. And that’s partly because we need to get to a critical mass of seats, which we should be getting through towards later this year.

Source: Q4 earnings call.

Valuation / Pricing

My target price for CXM is driven by the following assumptions for the bull vs bear scenarios of the FY 2025 (FY ending on January 2025) projection:

1. Bull scenario (70% probability) assumptions – I expect CXM to achieve an FY 2025 revenue of $805.5 million, a 10% growth, in line with the guidance. I assign CXM a forward P/S of 5.3x, which is where it is trading today. It also implies a share price appreciation to $14.7. In this scenario, I foresee CXM exceeding expectations by landing more enterprise clients, driven by the strong appeal of its AI-driven offerings.

2. Bear scenario (30% probability) assumptions – CXM to deliver FY 2025 revenue of $800 million, missing the lower end range of its $804.5 million revenue guidance. In this scenario, I assign CXM a forward P/S of 4, projecting a correction to $11 level for the FY.

Consolidating all the information above into my model, I arrived at an FY 2025 weighted target price of $13.6 per share, projecting a potential upside of just under 11%. I would rate the stock a buy.

I believe CXM appears undervalued. As a side note, there is a possibility of CXM outperforming my price target projection, due to my conservative assumptions. Though I applied a 70-30 bull-bear weighted probability that leans towards the bull scenario, the 4x P/S assigned for the bear scenario assumes a considerable multiple contraction.

The last time CXM was trading at that level was towards the beginning of last year, when the stock was near its all-time low and under immense selling pressure. I also assume that CXM will miss its FY 2025 revenue guidance by over $4 million in the bear case scenario, even when the management recently narrowed its guidance range due to better pipeline visibility in Q4 2024.

Conclusion

CXM should continue to benefit from the secular AI trends. Its unique multichannel AI-driven CX platform enables productivity gains as well as cost saving initiatives, two key features that will further drive demand for its offerings. Risk could be minimal, though investors may need to monitor CXM’s progress in its competition against incumbents in CCaaS, a market it entered recently. My conservative 1-year price target of $13.6 projects an 11% upside. I believe CXM still appears undervalued, and I rate the stock a buy for now.