Why Shares of Smartsheet Inc. Surged Today

What happened

Shares of Smartsheet (NYSE: SMAR) jumped on Tuesday after the cloud collaboration software provider reported its first-quarter results. Smartsheet beat analyst estimates for both revenue and earnings, and it provided guidance that was ahead of expectations. The stock was up about 13.9% at 12:30 p.m. EDT.

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So what

Smartsheet reported first-quarter revenue of $36.3 million, up 63% year over year and about $3.2 million higher than the average analyst estimate. Subscription revenue totaled $32.1 million, up 57% year over year, while professional services revenue rose 129% to $4.3 million. The company ended the quarter with over 75,000 customers.

Non-GAAP (generally accepted accounting principles) earnings per share came in at a loss of $0.12, down from a loss of $0.08 in the prior-year period but $0.06 better than analysts were expecting. That translates into a net loss of $11.0 million. GAAP operating expenses soared 69% year over year, with research and development spending nearly doubling.

Looking ahead, Smartsheet expects second-quarter revenue between $38.5 million and $39.5 million, along with a non-GAAP loss per share between $0.13 and $0.14. For the full year, the company expects revenue between $159 million and $162 million, and a non-GAAP loss per share between $0.56 and $0.59. Those ranges are mostly higher than analysts were expecting.

Now what

Following Tuesday's rally, Smartsheet is valued at roughly $3 billion, using the weighted diluted share count expected for the full fiscal year. That puts the price-to-sales ratio at the midpoint of the company's revenue guidance range at just about 19. There's a lot of optimism baked into the stock price.

Smartsheet expects its revenue growth rate to slow to between 43% and 46% this year, along with significant losses and a negative free cash flow of up to $25 million. While the market is pushing up the stock on a better-than-expected first quarter, I'm not convinced the valuation makes any sense at all.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.