Activist Engaged Sees Upside at New Relic As Changes Take Hold

Scott Deveau

07 Oct 2021, 03:27 AM IST

(Bloomberg) -- Activist investor Engaged Capital sees substantial upside at New Relic Inc. if the software maker can narrow the trading gap between itself and rivals.

Engaged, which owns a 3% stake in New Relic, wrote in an investor presentation Wednesday that if New Relic traded more in line with its peers -- at about 14 times forward earnings -- it would be worth about $215 a share. At a similar multiple to Datadog Inc., that valuation could climb to as much as $550 a share.

While New Relic’s shares have gained more than 28% since Chief Executive Officer Bill Staples was appointed in May, they trade at around $74 apiece, or about six times forward earnings.

San Francisco-based New Relic reached a settlement in June with one of its largest shareholders, HMI Capital Management, after consultation with investors including Engaged Capital. The agreement saw HMI’s RK Mahendran appointed to the board and followed Staples’s promotion to CEO. New Relic has also declassified its board, a shareholder-friendly move that means most of the company’s directors will be up for re-election each year.

Its shares were trading at $74.11 apiece in New York at 12:49 p.m., giving the company a market value of about $4.8 billion.

A representative for New Relic wasn’t immediately available for comment.

Engaged, based in Newport Beach, California, believes the changes have primed New Relic to return to its former glory, according to the presentation, which was obtained by Bloomberg News. The amount of data the company receives from customers has increased and an improved pricing model is taking effect, both of which are starting to accelerate revenue growth, Engaged said.

Still, that growth continues to lag New Relic’s competitors. As of June 21, New Relic had a revenue growth rate of 11% compared to 35% at Dynatrace Inc. and 67% at Datadog, Engaged said. New Relic’s management said on an August conference call that they’re aiming for a revenue growth rate of about 25% in the intermediate term.