Goldman Sachs upgrades nCino to Buy with $42 price target: Should you invest?

nCino Inc. (NASDAQ: NCNO) received a significant boost today when Goldman Sachs upgraded its rating from Neutral to Buy, with a new price target of $42, up from $34.

This change reflects Goldman’s growing confidence in nCino’s ability to navigate recent business challenges and capitalize on new growth opportunities.

Analyst Adam Hotchkiss noted that nCino is expected to overcome headwinds such as high interest rates and peak mortgage customer churn, thanks to improving retention rates and better cross-selling efforts.

Hotchkiss highlighted nCino’s strong innovation track record and deep-rooted relationships with major financial institutions as key factors that will support growth moving forward.

Q2 earnings expectations & Q1 earnings

The upgrade comes at a critical time for nCino as it approaches its Q2 2024 earnings report, scheduled for August 30.

Analysts are cautiously optimistic, with the consensus predicting a loss per share of $0.08, an improvement from the $0.14 loss per share reported in Q2 2023.

Revenue is expected to reach $131.08 million, up from $117.2 million a year earlier.

However, it is worth noting that 10 out of 11 analysts on Wall Street who cover the company have revised their EPS estimates downward in the last 90 days, reflecting some uncertainty about nCino’s near-term performance amid a challenging macroeconomic environment.

nCino’s Q1 2024 results showcased resilience, with the company reporting a Non-GAAP EPS of $0.19, surpassing expectations by $0.06.

Revenue for the quarter was $128.09 million, representing a 12.7% year-over-year increase and exceeding analyst expectations by $1.45 million.

The company also reported a Total Remaining Performance Obligation (RPO) of $1.069 billion, up 17% from the previous year, indicating a strong backlog of future revenue.

From a fundamental perspective, nCino appears to be on solid footing.

The company has made significant strides in improving its operational efficiency, as evidenced by a reduction in GAAP operating losses and a substantial increase in non-GAAP operating income.

The Q1 GAAP loss from operations was $3.7 million, a marked improvement from the $8.6 million loss reported in Q1 2023.

Non-GAAP operating income, on the other hand, more than doubled to $24.4 million from $10.9 million in the same period.

nCino’s growth drivers

One of the primary drivers of nCino’s growth is its ability to expand its wallet share with existing customers.

The company has demonstrated a strong ability to cross-sell additional products to its customer base, which not only enhances revenue but also increases customer stickiness.

This is particularly important in the financial technology space, where switching costs can be high once a customer has integrated a platform like nCino’s into their operations.

Historically, nCino has been able to increase the annual contract value of its customers by 1.5x to 2x over the years, underscoring the effectiveness of its cross-selling strategy.

nCino’s market opportunity remains substantial as banks and financial institutions continue to invest in digital transformation. The company’s platform, which unifies various banking processes on a single platform, offers a superior alternative to point solutions that often lack seamless integration.

As banks face increasing pressure to modernize and meet the demands of a younger, tech-savvy customer base, nCino is well-positioned to capture a growing share of this market. According to research by IDC, the banking industry is expected to significantly increase its spending on cloud services, with a projected growth rate of around 20% CAGR through 2027.

Attractive valuation

Valuation is another critical aspect where nCino stands out. According to analysts, despite recent growth concerns, the company’s current valuation offers an attractive entry point for investors.

Using a forward revenue approach, some analysts expect nCino to be worth approximately $40=42 per share, which aligns closely with Goldman’s updated price target.

This valuation is based on conservative growth estimates, assuming a gradual recovery in the economy. If nCino can accelerate its growth beyond these expectations, there is potential for further upside, especially considering the industry averages for cloud technology companies.

Elevated interest rates a challenge

However, risks remain, particularly related to macroeconomic factors. Elevated interest rates and a slowdown in the mortgage industry could impact nCino’s growth trajectory.

Additionally, changes in financial regulations could pose challenges, although nCino’s robust compliance capabilities should help mitigate some of these risks. The company’s ability to navigate these external factors will be crucial in maintaining its growth momentum.

Looking ahead, the upcoming Q2 earnings report will be a key indicator of how well nCino is managing these challenges.

Investors will be closely watching the company’s revenue growth, profitability, and updates on its business pipeline. Any positive surprises in these areas could reinforce the bullish sentiment around the stock.

nCino’s recent business highlights also suggest that the company is making strategic moves to secure long-term growth.

The expansion of its partnership with M&T Bank and the addition of new clients, such as a specialist lender in the UK, highlights the company’s ability to attract and retain large financial institutions.

Now let’s transition to a technical analysis of nCino’s stock, where we will delve into the charts to better understand the stock’s price trajectory and potential upside from here.

Trading in a range

Although nCino’s stock has fallen significantly from the highs above $100 it saw after its IPO in 2020, it has found stability over the past few months. Since June last year, it has been trading in a range between $27 and $35.6.

NCNO chart by TradingView

For the stock to enter an uptrend it will have to break above the upper band of this range and give a weekly closing above it.

However, investors who are bullish on the stock can initiate a small long position at current levels around $33 and add to it if the stock gives a weekly closing above$35.6.

The stop loss for long positions must be set at $26.95.

Traders who have a bearish outlook on the stock have a low-risk entry on their hands currently. They can short the stock near $33.5 with a stop loss at $36.

If the stock continues to remain range-bound, it can again fall and find support near $27, where one can book profits.

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