May 14 2020 - Medallia: Undervalued Potential

Summary

Medallia's product evolution puts it in a strong position to capture more market share.

While it trades at a discount to its peers, it has capabilities that could drive rapid product adoption.

Its recent acquisitions have the potential to drive strong cross-sell.

Medallia's EX solution should be valued separately as the rise of remote work platforms will drive strong demand in the coming quarters.

Medallia's (MDLA) valuation doesn't reflect the full capabilities of its offerings. Medallia is one of the few platforms with the assets to ingest, structure, analyze, and draw actionable insights from the next volume of greenfield data that will be generated by enterprises across the globe.

The rise of employee-to-employee, and employee-to-customer engagement platforms like Zoom (ZM), Teams, and Slack (WORK), will expand the monetizable addressable market that platforms like Medallia are positioned to profit from in the coming quarters. Medallia has the capability to integrate and analyze social media conversations, videos, texts, audio, and contact center data.

As a result, the WFH theme will give Medallia the massive lift it needs to turbocharge its growth trajectory. Given the momentum of the current work from home initiatives to drive business-to-business and business-to-consumer data, Medallia has strong potentials to outperform in the near term.

Demand (Rating: Bullish)

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Market opportunity

Medallia plays into the m experience management market. This market aims to scale data analytics across multiple verticals. Medallia is a leader in the experience management space for large enterprises. Moving into the SMB space will bring it in close competition with Qualtrics (acquired by SAP), and SurveyMonkey (SVMK). Regardless, Medallia's experience in the customer experience space will ensure it continues to grow market share if it decides to play in the midmarket.

Potential

Medallia's products are structured to be deployed by any organization that collects feedback from customers and employees. This includes all organizations that have hired or can potentially hire management consultants to collect data to solve business problems. The data includes feedback from customers, product usage, employees, and suppliers.

Given the huge market opportunity and strong potential to continue to sell to large enterprises and SMEs, I remain bullish on the demand for Medallia's products in the near term.

Business/Financials (Rating: Neutral)

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Source: Author (using data from Seeking Alpha)

Product (Experience Cloud)

Medallia's experience cloud is a platform that streamlines data aggregation and analysis across multiple verticals. This platform evolved from a mixture or internal product development and acquisitions. The most recent acquisition (LivingLens) adds the capability to analyze and draw actionable insights from videos. This means employees can store and analyze data after meetings, presentations, or interactions with customers. This can be a game-changer given the rise of video conferencing platforms.

This adds to the data and insights generated from social media channels, texts, audio recordings, and other verticals where data can be collected and analyzed.

Other notable acquisitions include:

Voici: a voice to text specialist for m in cash.

Zingle: a customer experience platform for real-time product and service request focused on the hospitality, travel, and retail verticals. The acquisition was completed at m.

Strikedeck: a customer success solution that provides actionable insights to improve a customer's lifecycle journey.

Cooladata: a cloud-based behavioral analytics platform.

Crowdicity: a solution for crowdsourcing innovative ideas from customers and employees.

Promoter.io: a net promoter score platform.

Medallia's acquisition strategy is geared toward evolving its capabilities as the go-to platform for all digital experience data gathering and analysis. Given the low visibility of its offerings, Medallia will have to spend a lot of money to advertise the strengths of its platform.

Financials

Medallia is recording double-digit growth. However, this growth rate has been declining. On a positive note, management has invested in evolving its products to add more value to users. The company's platform now has twelve modules which it can cross-sell to drive average revenue per customer.

To win near term market share, Medallia has to attract talents to continue to evolve/integrate its products and drive sales. This means near term cash flow will be a function of R&D, and stock-based compensation. Also, given that most of its acquisitions are fresh, it will have to keep using OPEX to drive product adoption. Promoting the ever-evolving efficacy of its platform will also require investments in strategic partnerships to growth-hack the adoption of its offerings. This will take time, and the reward might not reflect in its growth factor in the near term.

Macro/Competitors (Rating: Neutral)

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Source: Google Trends

Competitors

Medallia's top competitors are SurveyMonkey and Qualtrics. Medallia plays more into the large enterprise space, while its top competitors are less focused on large enterprises. Going forward, Medallia is hoping to penetrate the mid-market to expand its near term monetizable market. SAP recently acquired Qualtrics in a deal worth b. This highlights the value inherent in digital experience platforms. While Medallia has the brand name to disrupt the mid-market, it's not clear if it has the patience. Its recent acquisitions will require some fine-tuning, and the development of an efficient go-to-market plan will be its main focus in the near term.

Macro

Besides the impact on small businesses and highly leveraged large enterprises, the work from home theme has the potential to boost Medallia's revenue. Most enterprises have adopted work from home platforms in which data can be stored and analyzed to provide actionable business insights. These include social media platforms, video conferencing platforms, chat platforms, and other productivity tools. As a tech CEO, I find it attractive to have a platform that can provide business insights from products like Slack, Zendesk (ZEN), and Zoom. Medallia is one of the few platforms with the ability to collect and analyze data from this growing trend.

Investors/Valuation (Rating: Bullish)

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Source: Author (using data from Seeking Alpha)

Investors

Investors have been less bullish on Medallia compared to other SaaS stocks. This is a function of the narrative that has been tied to its capabilities. Since Medallia's products are still evolving, it hasn't created the depth of game-changing business optimization trends to catch the attention of investors.

Valuation

Medallia is undervalued at the current price because its near term monetizable potential has been widened. Companies will rely on experience management platforms a whole lot more compared to the pre-COVID-19 era. This will make it easier for Medallia to close new deals while empowering the decision-making capabilities of its analytics engine. As the flywheel accelerates, Medallia will be able to provide more actionable insights across channels like video, text, audio, and social media. In a scenario in which Medallia strengthens the depth of its partnership with video conferencing platforms to help businesses draw actionable insights from meeting transcripts, phone calls, interviews, and interactions with customers, Medallia can potentially become the platform that aggregates the latest cohort of unstructured data that the internet is currently generating. As a result, it is important to carve out the customer experience portion of Medallia from the employee experience portion. The customer experience portion already trades at a suppressed valuation to its peers. As a result, the entire business ex-EX is undervalued.

The EX portion has strong potential to be a game-changer when married with any video conferencing platform that churns out a huge volume of actionable insights from calls, transcribed texts, and video meetings after the acquisition of LivingLens. This includes platforms like Zoom, Webex, Teams, and Google Meet. In Zoom's marketplace, there are startups that provide text and call analytics. However, they don't integrate into a robust customer experience platform and capabilities that Medallia can provide.

In a scenario in which Medallia partners with a video conferencing platform, providing actionable insights from video meetings and calls at /user/month to a million users translates to an annual revenue run rate of 0million. If Medallia is interpreted as a threat by leveraging the marketplace of a video conferencing platform to drive growth, considering the potential synergies could lead to a merger. I doubt it wouldn't be given the permission to try given that LivingLens, SurveyMonkey, and Qualtrics are integrated with Zoom's marketplace. Applying a 5x P/S ratio on the EX business gives it a valuation of billion on million paying users. This valuation is bearish, given the volume of students and organizations that can gain from Medallia's video analytics offerings.

Risks

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Source: Author

In the years ended January 31, 2020, 2019 and 2018, our top 10 customers accounted for 25%, 25% and 29% of our revenue, respectively.

A major risk with Medallia is its cash flow management. Medallia is still evolving its products. This means OPEX efficiency has to improve to avoid further EPS dilution.

Another risk inherent in the company is its reliance on its top ten customers for 25% of revenue.

Lastly, the location of the R&D team in Argentina exposes its cost buckets to FX fluctuation.

Conclusion (Overall Rating: Outperform)

Medallia's valuation is trapped in the narrative that it's a platform for conducting surveys. However, a careful study of its products reveals it has evolved beyond surveys. It now has the capability to collect and analyze data across multiple verticals. Some of these verticals play into hot tech trends, such as the rapid adoption of remote working tools and video conferencing platforms. These trends will drive the value of Medallia's offering. The potential to gain from a strategic partnership with productivity tools is huge. This makes Medallia undervalued at the current price.

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