HashiCorp, Inc. (NASDAQ: HCP)
HashiCorp Inc. (the "Company") is one of the most recent IPO's. The company was well-received on the first day of trading. Below is our analysis of the company.
Short-term: Sell
Long-term: Buy
Founded in 2012, the Company focuses on managing cloud infrastructure by adopting an innovative approach. The Company has built a portfolio of products based on the need for having consistent workflows to provision, secure, connect, and run infrastructure and applications across multiple public and private cloud environments. The Company's expected growth is based on the anticipated mass adoption of cloud services. The continued advances and innovations in this field will accelerate the adoption.
The Company's products are open source. The founders believed that this would result in greater strength of the products and spark innovation. The Company then converts the (free) users to paid customers, as it appears that becoming a paid customer is inevitable for larger companies. The Company has 2,101 customers, expecting to grow its customer base as well as increase the revenue per client.
Given the Company's strong position in the market, long-term growth is expected if the Company can execute on its strategies. However, we expect a decline in the price per share in the short term because of the impacts of a policy shift during the year preceding the IPO (see below).
Indicators in support of long-term growth:
- Strong community of developers and the high-quality of the products
- Overall expected growth of the cloud market
- Above-average management; CEO has been with the Company since 2015; one of the co-founders acts as CTO
- Repeat sale is expected given the nature of the business (Switching the provider is difficult for customers).
- Straight-forward and proper accounting policies (e.g., capitalization policy only applies to internally-used software, and all R&D relating to products is expensed).
In the short term, we see some hurdles to justify the current price per share because the current valuation prices in a future growth that is equal to historical growth. We believe this will not be achievable in the short term due to the following reasons:
- In preparation for IPO and in an effort to reduce the expenses, the Company implemented cost-cutting policies: both R&D and Sales expenses are lower as a % of revenue for the six months ending Jul 2021 compared with Jul 2020. Combine this with the multiple reviews from public sources that employees have complained that salaries at HashiCorp are lower than other comparable tech companies. Therefore, the shortage of talent (at least temporarily) might hinder Company's efforts to grow the business. It appears that the management is not oblivious to this fact; therefore, we expect course correction, but it will take time.
- It appears one of the co-founders is not with the Company anymore. Again, this does not have a permanent long-term adverse impact if managed appropriately, but there might be some short-term implications.
Other items to note:
The IPO is for Class A Common shares which have 1 voting right per share. The original owners of the Company own Class B Common shares which have 10 voting rights per share. Therefore, limited decision-making power by the outsiders.