Shareholders of nCino would probably like to forget the past six months even happened. The stock dropped 20.9% and now trades at $27.22. This might have investors contemplating their next move.
Is there a buying opportunity in nCino, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is nCino Not Exciting?
Even with the cheaper entry price, we're swiping left on nCino for now. Here are three reasons why there are better opportunities than NCNO and a stock we'd rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect nCino’s revenue to rise by 5.9%, a deceleration versus This projection doesn't excite us and indicates its products and services will see some demand headwinds.
2. Low Gross Margin Reveals Weak Structural Profitability
For software companies like nCino, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
nCino’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.1% gross margin over the last year. Said differently, nCino had to pay a chunky $39.95 to its service providers for every $100 in revenue. 
3. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
nCino’s expensive cost structure has contributed to an average operating margin of negative 2.9% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if nCino reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.
Final Judgment
nCino’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 5.4× forward price-to-sales (or $27.22 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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