Starboard puts growth vs profitability imbalance at heart of investment thesis
2022.10.18 11:24
Starboard puts growth vs profitability imbalance at heart of investment thesis
Budrigannews.com – Activist investor Jeffrey Smith said on Tuesday his investment firm Starboard Value was currently involved with Wix (NASDAQ:).com, Splunk (NASDAQ:) and Salesforce (NYSE:), and was engaged with management for ways to bolster valuations of these high-growth companies.
Smith said the common theme among all three companies was that the level of growth they were promising had not translated into appropriate profitability and, therefore, value for its shareholders.
High-growth companies enjoyed booming valuations in recent years but, in 2022, as U.S. interest rates have risen, investors have shifted focus from prioritizing future potential towards a company’s current performance, depressing market values.
The trio of stocks presented by Smith have fallen between 37% and 54% this year.
“We need to appeal to the management team to be as competitive at producing value for shareholders,” Smith said of Salesforce, noting it had market-leading positions among all of its products and a highly-competitive culture.
“They win in the marketplace. We need them to win for shareholders. That’s why we’re involved.”
Smith was detailing the thesis of his most recent investments at the 13D Monitor Active-Passive Investor Summit on Tuesday.
On Salesforce, Smith said it had been engaging with its management team in “recent months” and that the new executives – including co-CEO Bret Taylor, who is also chairman of the board of Twitter Inc (NYSE:) and was promoted to his Salesforce role in November 2021 – were better focused on balancing growth aspirations and profit delivery.
However, recent targets unveiled by Salesforce would still translate into performance similar or below that promised by peers, even though Salesforce had much greater scale.
Why is Salesforce is trading it just 10 to 12 times free cash flow per share with peers at 20 to 25 times, Smith said, adding he sees “tremendous upside” for the share price.
Starboard is among the industry’s busiest activist investors and has had a high success rate of placing directors onto corporate boards, often in settlements with the company.
On Wix, in which Reuters revealed last month Starboard had built a 9% stake, Smith said he welcomed a cost-cutting program which the company has already announced but said things can improve even more above the company’s target of reaching 20% free cash flow margins by 2025.
“We expect Wix to need to target greater than 25% margins, which would make it possible to reach a more appropriate growth plus profitability target of 40 plus percent,” Smith said.
At Splunk, Smith said he and his team are enthusiastic about the company’s new CEO, Gary Steele, and look forward to “better execution” saying that the there is room to push for operational improvements.
“We think there’s significant upside at Splunk,” Smith said noting the company could boost free cash flow margins and maintain strong growth profile that could allow Splunk to generate eight to $9 of free cash flow per share by 2025.
He added that, as well as growing profitability, Splunk’s business made it highly attractive as a potential acquisition target. In February, the Wall Street Journal reported that Cisco Systems Inc (NASDAQ:) made a $20-billion offer for Splunk, and Smith said there have been other suitors in recent years.
“This dynamic creates multiple ways to win and makes the investment in Splunk even more interesting,” he added.
