Smartsheet: Upside Still Attractive With Valuation Support From Takeover News

Core View - Smartsheet (NYSE: SMAR) is rated as a buy due to its strong competitive position and potential for growth exceeding 20% in the foreseeable future, despite some recent performance weaknesses in 2Q25 [2][3] Earnings Results Update - In 2Q25, Smartsheet reported total revenue of $276.4 million, a 17% increase year-over-year, surpassing management's guidance and consensus estimates [3] - Gross margin improved by 70 basis points year-over-year to 84.3%, while EBIT margin expanded by 820 basis points year-over-year to 16.4%, exceeding consensus expectations [3] - Net income reached $61.6 million with an adjusted EPS of $0.44 [3] Positive Takeaway on Growth - Smartsheet remains a dominant player in the enterprise space, with customers generating over $100k in annual contract value (ACV) growing by 23% year-over-year [4] - The company secured three large contracts exceeding $1 million in ACV, indicating strong demand [4] - The enterprise dollar-based net retention rate (DBNRR) remains around 120%, and revenue from Capabilities constituted 35% of subscription revenue, reflecting a 30% year-over-year growth [4] - The transition to a new pricing model is on track, with positive early adoption signs from new customers [4] Negative Points to Monitor - Annual recurring revenue (ARR) growth slowed to 17% in 2Q25 from 19% in 1Q25, and gross churn increased slightly to 4.5%, leading to a decline in overall DBNRR to 114% [6] - The small and medium-sized business (SMB) customer segment is under pressure, with DBNRR for this cohort falling below 100%, which may hinder overall growth [7] Valuation and Takeover Interest - Reports indicate that Vista Equity and Blackstone are in discussions to acquire Smartsheet for $7 billion, which could provide a valuation floor [8] - The target price for Smartsheet is estimated at $75.13, representing a 47% upside from the current share price of $51.21 [14] Conclusion - Despite macroeconomic pressures affecting the SMB segment, Smartsheet's growth potential remains solid, with expectations of returning to over 20% growth in the future, supported by strong performance in the enterprise space and takeover interest [13]