After increasing its hold on New Relic Inc. (NEWR, Financial) over the past several quarters and even gaining board seats, Jana Partners (Trades, Portfolio) revealed last week it curbed its investment by 8.99%.
Taking a value-oriented, event-driven approach to picking stocks, the New York-based firm founded in 2001 by Barry Rosenstein often enters activist positions in order to help unlock value for shareholders.
In the case of New Relic, Jana took action once the stock lost half of its value after peaking in November 2021, shaking up its board of directors in the process by acquiring two seats. It also encouraged the company to explore a potential sale, but there has been no news on that front.
Having established the position in the first quarter of the year, GuruFocus Real-Time Picks, a Premium feature based on 13D, 13G and Form 4 filings, showed the activist firm sold 317,488 shares of the San Francisco-based software company on Nov. 15. The trade impacted the equity portfolio by -1.67%. The stock traded for an average price of $59.77 per share on the day of the transaction.
Jana now holds 3.2 million shares total, which represent 16.71% of the equity portfolio. It was the second-largest holding as of the end of the third quarter according to the 13F report. GuruFocus estimates the firm has lost 11.83% on the investment so far.
Valuation
The company, which develops cloud-based software analytics solutions to help websites and apps track the performance of their services, has a $3.48 billion market cap; its shares were trading around $51.13 on Tuesday with a price-book ratio of 10.77 and a price-sales ratio of 3.95.
The GF Value Line suggests the stock, while undervalued, is a possible value trap currently based on its historical ratios, past financial performance and analysts’ future earnings projections. As such, potential investors should do thorough research before making a decision.
Further, the GF Score of 73 out of 100 indicates the company is likely to have average performance going forward. While New Relic received high ranks for momentum and GF Value, it got middling marks for growth and financial strength as well as a low profitability rating.
The Altman Z-Score of 1.46 warns the company could be at risk of bankruptcy since its assets are building up at a faster rate than revenue is growing. Further, its operating margin and gross margin are both declining, while the returns on equity, assets and capital are negative and underperforming a majority of its competitors.
New Relic is supported, however, by a moderate Piotroski F-Score of 6 out of 9, meaning conditions are typical for a stable company. It also has a predictability rank of one out of five stars. According to GuruFocus research, companies with this rank return an average of 1.1% annually over a 10-year period.
Financial update
On Nov. 8, New Relic reported its results for the second quarter of fiscal 2023.
For the three months ended Sept. 30, the company posted revenue of $226.9 million, which grew 16% from the prior-year quarter. The net loss of $46 million also narrowed from last year, while non-GAAP earnings of 13 cents per share improved from a loss of 10 cents.
In a statement, CEO Bill Staples noted the company was able to beat the high end of its guidance by focusing on executing its key priorities.
“We feel very well positioned as a strategic partner to our customers helping them standardize their observability practice on New Relic, which can improve uptime and grow revenue, accelerate time to market, and lower tooling and engineering cost,” he said. “We are winning new platform customers at industry leading levels and seeing continued success with customers expanding their use of the platform.”
Looking ahead to the third quarter, New Relic expects revenue between $230 million and $235 million and earnings per share ranging from 14 cents to 17 cents.
As for the full year, the company updated its guidance. It now projects between $912 million and $920 million in revenue and earnings to range from 16 cents to 22 cents per share.
Guru trading activity
Of the gurus invested in New Relic, Jana has the largest stake with 4.70% of its outstanding shares.
During the third quarter, Larry Robbins (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) entered new positions in the stock, while Jim Simons (Trades, Portfolio)’ Renaissance Technologies boosted its holding by 108.2%.
In contrast, Steven Cohen (Trades, Portfolio) slashed his investment by 78.18%. Scottish investment firm Baillie Gifford (Trades, Portfolio) left its position unchanged.
Portfolio composition
As of the three months ended Sept. 30, Jana’s $1.17 billion equity portfolio, which consisted of 11 stocks, was most heavily invested in the consumer defensive sector with a 35.53% weight. Health care stocks had the second-largest representation at 28.74%, followed by technology space at 18.17%.
Based on 13F data, other tech stocks the firm was invested in as of the end of the third quarter were Momentive Global Inc. (MNTV, Financial) and BlackSky Technology Inc. (BKSY, Financial).
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
