A Low-Priced SaaS Play Catches My Eye

For our next covered call trade idea, we are venturing into the technology space. The target of our desire is a provider of enterprise cloud solutions that is increasingly integrating AI into its offerings. 

The company came public near the tail end of the huge IPO/SPAC wave of 2020 and 2021, which was driven largely by the easy money policies of the Federal Reserve in response to the Covid pandemic. Like most names of that "vintage," the stock has lost a great deal of shareholder value since it came public. However, the company does appear to be making some strides. In addition, it has a rock-solid balance sheet and recently announced a significant stock buyback program.

The small-cap technology solution provider in question is Sprinklr, Inc. CXM. The company’s software platform allows customer-facing teams in different departments and teams to communicate and collaborate across various digital channels. Most of the Sprinklr’s revenues comes from recurring subscription services.

Sprinklr slightly beat both top and bottom-line expectations with its first-quarter results reported early in June. Management also provided a minor boost to guidance and noted that one of its core focus areas remains expanding the capabilities of the company's AI-native platform. 

Like most service providers in similar markets, Sprinklr is navigating an increasingly uncertain market. Many companies are increasingly reluctant to commit to big ticket purchases until they see more clarity around the direction of the economy. That said, Sprinklr is experiencing mid-single digit revenue growth, which should translate in slightly better than 10% earnings growth and Sprinklr is solidly profitable. 

With its new CEO, some of the company's transformation initiatives appear to be gaining traction and its operating margins showed impressive improvement on a year-over-year basis in the most recent quarter. One of the efforts that seems to be paying early dividends under new leadership is Sprinklr’s focus on deepening the relationships it has with its top customers, which provide roughly 80% of its overall revenues.

The best part of the investment thesis around Sprinklr is its balance sheet and free cash flow. Sprinklr currently trades around $8.25 and sports an approximate market capitalization of $2.1 billion. It carries no debt and has roughly $570 million of cash and marketable securities on its balance sheet as of the end of Q1. 

Meanwhile, management just announced a $150 million stock buyback plan that would retire approximately 7% of outstanding shares at current trading levels. Management has also guided that it expects to achieve at least $125 million in free cash flow this fiscal year.

Given this, while I don’t expect a huge rise in the stock, but there doesn’t appear to be much downside. With the covered call strategy highlighted below I can make a decent return if the stock just trades sideways or declines slightly and garner some additional downside protection to boot. I also am not opposed to accumulating a small stake in this company at lower entry points if it comes to that.

Option Strategy

This is how one can initiate a holding in CXM with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.

Using the November $7.50 call strikes, fashion a covered call order with a net debit in the $6.80 to $7.00 a share range (net stock price - option premium). 

This strategy provides downside protection of just over 20% with upside potential of nearly 9% even if this equity trades down by about 10% over the option duration. Not huge upside by any means, but I am just trying to hit consistent singles within an overbought market right now.

At the time of publication, Jensen was long CXM.