Despite near-term headwinds, the SaaS industry looks well-positioned for long-term growth as more enterprises undergo digital transformation and the adoption of cloud services increases. However, given the macroeconomic challenges, will Informatica (INFA) be a secure buy for investors? Read more to learn my view...

Since last year software stocks have faced the brunt of the Fed’s aggressive rate hikes leading to a price correction in most tech stocks. Despite the banking crisis, the Fed went ahead with a 25-basis point rate hike and is expected to keep hiking interest rates this year.

Although this might keep the software industry under pressure in the near term, the long-term prospects of the industry look bright. Investors looking for software stocks can invest in enterprise cloud management leader Informatica Inc. (INFA).

The company develops an artificial intelligence-powered platform that connects, manages, and unifies data across multi-cloud, hybrid systems at an enterprise scale. It surpassed the consensus EPS estimate by 10.5% in the fourth quarter. However, its revenue came 1.5% below analyst estimates.

INFA’s CEO Amit Walia said, “Our solid fourth-quarter performance capped a year in which we delivered cloud ARR and subscription ARR above expectations. We achieved new annual milestones that surpassed $1.5 billion in total ARR and total revenues and $450 million in cloud ARR. Our performance demonstrates the durability of our business model and our diligent execution to deliver balanced growth and profitability.”

For fiscal 2023, the company expects GAAP total revenues to come between $1.57 billion and $1.59 billion, representing an approximately 5% year-over-year growth at the midpoint of the range. Its Total ARR (Annual Recurring Revenue) is expected to come between $1,585 million and $1,615 million, representing a 5% year-over-year growth at the midpoint.

The company’s subscription ARR is expected to come in the range of $1,098 million and $1,118 million, representing an approximately 11% growth at the midpoint of the range. Its non-GAAP operating income is expected to come in the range of $400 million and $420 million, representing approximately 17% year-over-year growth at the midpoint of the range.

“Looking ahead, we are focusing on a cloud-only, consumption-driven strategy that is part of a multi-year plan driving new cloud business. With this strategy, we expect to streamline operational efforts as we aim to significantly improve operating leverage in 2023 and beyond,” Walia added.

Over the past three months, the company’s stock has gained 1.5% in price and has declined 0.6% year-date to close the last trading session at $16.20.

Here’s what could influence INFA’s performance in the upcoming months:

Robust Financials

INFA’s subscription revenues for the fourth quarter ended December 31, 2022, increased 3.8% year-over-year to $238.36 million. Its gross profit increased marginally year-over-year to $312.68 million. Its non-GAAP income from operations rose 19.5% year-over-year to $113.66 million.

Additionally, its adjusted EBITDA increased 17% year-over-year to $118.38 million, while its non-GAAP net EPS came in at $0.24, representing a 20% year-over-year increase from the prior-year quarter.

INFA’s total revenues for fiscal 2022 increased 4.2% year-over-year to $1.51 billion. Its gross profit increased 4.5% year-over-year to $1.16 billion. The company’s non-GAAP net income increased 14.9% year-over-year to $224.04 million. Its non-GAAP net EPS for the same period came in at $0.78, representing a 2.6% increase from the year-ago value.

In addition, INFA’s revenue grew at a CAGR of 4.8% over the past three years, while its EBITDA grew at a CAGR of 6.1%.

High Profitability

In terms of the trailing-12-month gross profit margin, INFA’s 79.53% is 57.9% higher than the 50.35% industry average. Its 13.31% trailing-12-month EBITDA margin is 36% higher than the 9.78% industry average. Likewise, its 21.92% trailing-12-month levered FCF margin is 260.7% higher than the industry average of 6.08%.

Mixed Valuation

In terms of forward non-GAAP P/E, INFA’s 19.50x is 6.1% lower than the 20.76x industry average. Its 14.12x forward EV/EBIT is 15.3% lower than the 16.67x industry average. Likewise, its 2.16x forward Price/Book is 41.2% lower than the 3.68x industry average.

On the other hand, its 13.67x forward EV/EBITDA is 1.4% higher than the 13.49x industry average. Also, its 2.91x forward Price/Sales is 8.4% higher than the 2.69x industry average.

Favorable Analyst Estimates

Analysts expect INFA’s EPS for fiscal 2023 and 2024 to increase 6.5% and 12.4% year-over-year to $0.83 and $0.93. In addition, its revenue for fiscal 2023 and 2024 is expected to increase 4.9% and 7.2% year-over-year to $1.58 billion and $1.69 billion.

INFA’s EPS and revenue for the quarter ending June 30, 2023, are expected to increase 10% and 3.2% year-over-year to $0.18 and $384.10 million, respectively. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.

POWR Ratings Show Promise

INFA has an overall A rating, equating to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. INFA has a B grade for Growth, in sync with its solid historical growth. It has a B grade for Sentiment, consistent with its positive analyst estimates.

INFA is ranked first out of 24 stocks in the Software - SAAS industry. Click here to access the INFA’s ratings for Value, Momentum, Stability, and Quality.

Bottom Line

Software plays a pivotal role in the day-to-day functioning of a business. Software-as-a-Service (SaaS) has gained prominence with the digital transformation and rising adoption of public cloud services. INFA is focusing on a cloud-only, consumption-driven strategy to drive the growth of its new cloud business. This is expected to help improve operating leverage significantly in the long term.

Despite the uncertain macroeconomic environment, the company remains confident of strong growth in subscription and cloud annual recurring revenue this year.

Given INFA’s robust financials, favorable analyst estimates, and high profitability, it could be a secure buy for investors.

How Does Informatica Inc. (INFA) Stack up Against Its Peers?

INFA has an overall POWR Rating of A, equating to a Strong Buy rating. One could also check out its B-rated industry peers: Park City Group, Inc. (PCYG), New Relic, Inc. (NEWR), and The Descartes Systems Group Inc. (DSGX).

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INFA shares were trading at $16.16 per share on Thursday afternoon, down $0.04 (-0.25%). Year-to-date, INFA has declined -0.80%, versus a 5.58% rise in the benchmark S&P 500 index during the same period.

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About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.

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