Sumo Logic Inc: Down 62%, This Big Data Play Presents an Opportunity

Searching the Bargain Bin With Sumo Logic Stock

Technology stocks are currently selling off on the fears of valuation and rising interest rates. But for investors who are willing to ride out the volatility, there are opportunities. That’s the case with Sumo Logic Inc (NASDAQ:SUMO), which is down 62% since February.

The selling offers investors a strong risk/reward opportunity to pick up a cloud and big data stock on the cheap.

Sumo Logic Inc develops cloud software that helps companies with analyzing critical data. Think about the potential as more companies demand solutions to interpret their data.

The company staged its initial public offering (IPO) in September 2020, with SUMO stock rocketing to a record $46.37 in February before crashing by 54% over the past three months.

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There was concern about the lockup period when the initial investors of Sumo Logic stock could sell their positions. But that period passed in March, so that risk is gone.

In addition, the stock has been attracting some buying from insiders.

Chart courtesy of StockCharts.com

Strong Revenue Growth Supports Bull Case for SUMO Stock

A look at Sumo Logic Inc’s four-year revenue picture shows the company growing its revenues in the strong double-digits since 2019 (ending January) to a record $202.6 million in 2021.

The compound annual growth rate (CAGR) during this time frame was an impressive 43%.

Fiscal YearRevenues (Millions)Growth
2018$67.8N/A
2019$103.652.8%
2020$155.149.6%
2021$202.630.7%

(Source: “Sumo Logic Inc.” MarketWatch, last accessed May 13, 2021.)

After that stellar revenue growth, the market is concerned that the growth will decline, but this is generally the case as companies expand.

Analysts estimate that Sumo Logic Inc will report revenue growth of 15.4% to $233.9 million in 2022 and 20% to $280.6 million in 2023. While that’s below the CAGR of the previous four years, the growth is still impressive. (Source: “Sumo Logic, Inc. (SUMO),” Yahoo! Finance, last accessed May 13, 2021.)

In my view, the issue with Sumo Logic is not the revenues, but the cost side and the company’s ability to generate earnings before interest, taxes, depreciation, and amortization (EBITDA) income and profitability.

Fiscal YearEBITDA (Millions)Growth
2018-$30.4N/A
2019-$46.2-51.7%
2020-$79.1-71.3%
2021-$69.412.3%

(Source: MarketWatch, op. cit.)

The important thing to watch for is a continued ramp-up in revenues and moves toward EBITDA income and profitability.  

While generating profits based on generally accepted accounting principles (GAAP) earnings per share (EPS) could be quite a few years away, Sumo Logic Inc has been narrowing its adjusted loss, which is what the market wants to see.

Fiscal YearGAAP Diluted EPSGrowth
2018-$0.32N/A
2019-$0.47-47.4%
2020-$0.91-92.8%
2021-$1.65-80.2%

(Source: MarketWatch, op. cit.)

The consensus estimate is that the company will narrow its adjusted loss to $0.48 per diluted share in 2022 and $0.42 per diluted share in 2023. (Source: Yahoo! Finance, op. cit.)

Sumo Logic Inc’s free cash flow has been negative, and I don’t expect a positive reading anytime soon as the company works on growing its revenues.

Fiscal YearFree Cash Flow (Millions)Growth
2018-$8.1N/A
2019-$23.7-190.9%
2020-$56.2-137.5%
2021-$49.511.9%

(Source: MarketWatch, op. cit.)

A big plus is that Sumo Logic will have time to execute its strategy without being concerned about needing capital. The company had no debt and held $404.4 million in cash at the end of January. (Source: Yahoo! Finance, op. cit.)

Analyst Take

I view the sell-off in Sumo Logic stock as an opportunity to consider picking up shares on the cheap and wait for things to improve.

Institutions have been increasing their positions in SUMO stock since January. The number of institutional investors jumped from 102 in January to the current 159 holding 70% of the outstanding shares. (Source: Yahoo! Finance, op. cit.)

In my view, the future opportunities in the big data space look bullish for Sumo Logic Inc.