New Relic Stock Tanks as Guidance Disappoints. Here’s What Analysts Are Saying.

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New Relic

was falling 29% on Wednesday, a day after issuing fiscal fourth-quarter guidance that frightened investors.

New Relic (ticker: NEWR) said it expects fourth-quarter revenue of between $204 million and $206 million, representing year-over-year growth of about 18% to 19%. Annual revenue was estimated at between $784 million and $786 million, with early growth of about 17% to 18%.

Adjusted net loss for the fourth quarter is predicted to be around 19 and 22 cents a share for the fourth quarter, and 72 cents to 75 cents a share for the year. Wall Street analysts surveyed by FactSet are calling for an adjusted loss of 21 cents a share on $205.2 million in quarterly revenue, and a yearly loss of 73 cents a share on revenue of $785.1 million.

While the fourth-quarter guidance was generally in line with estimates, it implies flat quarter-over-quarter growth, said Morgan Stanley analyst Sanjit Singh in a research note.

The cloud-based software services provider‘s revenue grew by 22% to $204 million in the fiscal third quarter, with an an adjusted loss of 18 cents a share. Analysts were expecting revenue of $200 million and a loss of 17 cents.

Singh remained optimistic overall, maintaining an Overweight rating on the stock given the third-quarter performance.

The stock was falling around 29% to $77.41 on Wednesday. The

S&P 500 was up 1%, while the

Dow Jones Industrial Average gained 0.7%. The

Nasdaq Composite rose 1.4%.

Needham analyst Mike Cikos also maintained a Buy rating on the stock, but lowered his price target to $100 from $131.

“Following three straight quarters of accelerating growth, management’s guide is surprising given the year-to-date focus on investments to nurture customer consumption and seed growth,” he wrote.

Cikos believes the guidance missed expectations because investors and management are still understanding usage trends for the company’s consumption-based pricing model. The new model could create seasonality trends where usage declines in December and January. It also means that each quarter brings a unique customer cohort with varying usage considerations. As the company completes its transition to the new pricing model, Cikos believes there will be a significant upside to the stock, as active customer accounts grow and mature.

“We believe at current valuation, the bar for New Relic has been reset lower and provides an interesting opportunity for GARP/Value investors,” he wrote.

Raymond James maintained a Strong Buy on the stock and a $140 price target despite the plunge in share price. Analyst Adam Tindle said that while the bank was “frustrated near-term,” it was waiting for more information at a May analyst day and will stick with the stock given a disproportionate risk and reward calculation.

BMO had a more contained view on the stock, with analyst Keith Bachman maintaining a Market Perform rating with a $96 target price. Bachman said he had concerns over the competitive landscape and the ability to reach and sustain revenue growth in the mid-20% range. The analyst doesn’t think management’s comments about modest profitability in 2023 would help with multiple expansion during a period of rising interest rates and inflation, he added.

Eight out of the 15 analysts covering the stock rated it a Buy or Overweight, while seven rated it a Hold.

Write to Sabrina Escobar at [email protected]