ServiceTitan stock analysis: growth, risks, long-term potential News ad

One of the hottest stocks to recently undergo an initial public offering (IPO) is technology company ServiceTitan. NASDAQ: TTAN. The software company made headlines after its valuation jumped more than 42% on its first trading day. However, since the one-day change on December 10, the share price has stagnated, falling 1%. On average, Wall Street analysts remain bullish on the title. So, what exactly does ServiceTitan do and what is the reason for all the hype around the company? I will answer these questions and give my opinion on the future of the company.

ServiceTitan: introducing technology into trade

ServiceTitan finds itself in an interesting situation. It strives to integrate sophisticated software into industries that have gone without it for years. ServiceTitan and many others call these industries “professions.” This includes people who work in plumbing, roofing, landscaping, carpentry and similar jobs. The founders of ServiceTitan were the sons of professional business owners. They noticed that low-cost, repetitive tasks were wasting their parents’ time. This prevented them from developing their business. They developed ServiceTitan software to meet the needs of professionals. It helps them scale and manage their business more efficiently.

Cloud software provides many features. This includes sales, marketing and customer service. This also extends to job scheduling and assignment, inventory tracking, workforce management, and payment processing. Overall, it appears to be a general store where merchants run their businesses. The software uses artificial intelligence to automate processes in these functional areas and provide its clients with better business opportunities.

Customers clearly love the product as soon as they use it. The company retained 95% of its customers during each of the last 10 quarters. These customers also spend more. The company’s net retention rate has exceeded 110% over the past 10 quarters. This means that, on average, existing customers’ spending increases by 10% each quarter.

Revenue Streams, Addressable Market and Growth Strategy

The company generates revenue primarily from software subscriptions and usage revenue from payment processing. Subscription revenue in the second quarter of 2024 was $138 million and payment revenue was $47 million. They accounted for 71% and 25% of total income; The rest was income from professional services. Payment volume is an important driver of revenue growth. As ServiceTitan helps its customers increase their revenue, the volume of payment processing going through the software also increases. This creates a feedback loop and directly aligns ServiceTitan’s interests with those of its customers.

For the 12 months ended July 31, 2024, ServiceTitan earned $685 million, with revenue up 24% in the most recent quarter. Overall, ServiceTitan targets a total addressable market of $13 billion. The company has significantly improved its profitability, but it still has a long way to go without adjustments. For the six months ended July 31, operating margin was -24%, but adjusted margin reached 5%.

The company aims to reach its large addressable market by increasing the gross transaction volume (GTV) that flow through its platform and selling additional products over time. It aims to expand GTV by servicing larger clients and expanding its client base through different types of deals.

ServiceTitan: Strong Long-Term Bullish Case with Short-Term Risk

Overall, ServiceTitan has a very strong business. Clear customer satisfaction shows that companies are benefiting greatly from it. A large total addressable market is a huge opportunity. The strong feedback loop between customer success and ServiceTitan’s success is also a stumbling block.

Growing the business by targeting larger clients could make a huge difference if successful, but it can be challenging. Larger players are likely to already have significant efficiencies, in contrast to smaller players. The company has seen a rise in the number of private equity firms in the industry. Increasing efficiency is their calling card. The question is whether they will seek to improve efficiency themselves or outsource it to ServiceTitan.

ServiceTitan also remains significantly unprofitable on an unadjusted basis. The company trades at a premium compared to its software peers. However, the long-term outlook for this stock is strong, although waiting for a better entry price may make sense in my opinion. This is especially true given the first-year challenges that many new public stocks often face. The average of 12 price targets released since the IPO suggests the stock has upside potential of 16% from its December 9 closing price.

Before you consider ServiceTitan, you need to hear this.

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