Quick Summary

New Relic (NEWR) makes cloud-based business software for monitoring software and infrastructure performance, as well as the measurement of end-user activity, a space known as application performance management (or APM). Its products help customers quickly pinpoint problems and/or bottlenecks in their software stack. New Relic has over 17,000 customers, with just over 1,000 "enterprise" customers that spend over $100,000 a year with the company. Traditionally, the company employed a subscription-based pricing model to a collection of 13 disparate tools. Starting in mid-2020, New Relic moved to their "New Relic One" approach, which consists of an integrated product platform (just 3 products) with pricing based on usage (amount of data stored and analyzed). New Relic is a global firm, with roughly 30% of revenue coming from outside the U.S.

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Does The Company Have Rising and Recurring Revenues?

SOMEWHAT. New Relic's 3-year average annual growth rate is attractive at 23%. However, the firm has seen a marked deterioration of revenue growth rates as it has scaled, with recent rates falling to 10% or below. Some of this is due to COVID disruptions, and some is due to accounting changes around the consumption-based pricing approach which hurts comparisons. Still, net dollar retention has fallen from over 130% a few years ago to under 100% currently. APM is a modestly sized market (about $6 billion), expected to grow at 11% rates and double by 2026. That's a decent opportunity, but competition will likely make it difficult for New Relic to grow really large. On the positive side, New Relic's revenues are recurring as long as its customers continue to use its products. Over the long term, a consumption-based model offers several advantages, including lower start-up costs for customers (which should improve new customer acquisition) and a bigger opportunity to capture spend from larger customers as they add applications and years of data to the platform.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. Like most large-scale enterprise software deployments, we feel New Relic has some SWITCHING COSTS in the form of setup, deployment, training, etc. However, monitoring software does not have the widespread usage or difficult-to-migrate data sets that many business process-style applications do, limiting its stickiness. Even the company itself estimates that the average APM deployment has less than 4 users (usually a dedicated "DevOps" team). It is likely that switching APM vendors is not as much of a hassle as switching (for example) a human resources system would be. This has become a crowded space, as well, with competition from goliaths like Cisco's (CSCO) AppDynamics down to direct competitors like Dynatrace (DT), Splunk (SPLK), and Datadog (DDOG). Barriers to entry don't look particularly high.

GreenDot Rating: YELLOW

New Relic operates in the extremely attractive cloud-based enterprise software segment, but it is one of the less interesting opportunities within it. It certainly has the positive attributes of switching costs, a reasonably sized and growing end market, and a recurring revenue model. However, we're already starting to see some of the challenges of the APM market weigh on New Relic's results. It is a somewhat limited size market, the software is not especially disruptive to migrate from, and there are a lot of competitors, many of which have performed better than New Relic. With a crowded market, in-flux business plan, and CEO transition (away from founder Lew Cirne), we see New Relic as a potential acquisition candidate in the near future. Aside from that, it only earns a YELLOW (somewhat attractive) rating at this point in time.