Why Shares of Rally Software Development Corp. Are Soaring Today

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Continue Reading Below

What: Shares of Rally Software , a cloud-based software provider, soared on Friday after the company reported strong revenue growth during the fourth quarter. By noon, the stock was up over 17%.

So what: Rally grew its fourth-quarter revenue by 25.5% year-over-year to $24.6 million, edging out analyst estimates. Subscription and support revenue rose by 18.8%, perpetual license revenue jumped 58%, and professional services revenue increased by 44.6% year-over-year. The total number of paid seats for the company's products rose 22% year-over-year.

Rally came up short on earnings, reporting a non-GAAP net loss of $0.28 per share, four cents worse than what analysts were expecting. Sales and marketing expense rose 39.7% year-over-year during the fourth quarter, far faster than revenue, leading to a larger operating loss compared to the same period last year.

Rally's guidance for the first quarter calls for revenue growth in the range of 25%-27%, and for fiscal 2016, Rally expects revenue to grow by 18%-21%. Non-GAAP losses for fiscal 2016 are expected to contract, with the company guiding for a loss of between $0.85 and $0.81 per share, smaller than the $1.07 per share Rally lost in fiscal 2015.

Now what: Rally's earnings were mixed with respect to analyst expectations, so the massive jump in the stock price as a result may come as a surprise. But the stock has been beaten down over the past 18 months, and even after the post-earnings rise the shares are still down nearly 60% from the highs of late 2013.

Continue Reading Below

Rally is trading at about 3.7 times sales after earnings, which is lower than a lot of fast-growing cloud software companies. Expectations may have been depressed, and the company's simply hitting analyst expectations for revenue was apparently enough to send the stock soaring. Rally has been unprofitable for its entire existence, and losses are only getting larger. Investors need to weigh the company's rapid revenue growth along with its unproven ability to turn a profit before considering investing in the stock.

The article Why Shares of Rally Software Development Corp. Are Soaring Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.