On Monday, Morgan Stanley upgraded BlackLine (NASDAQ:BL) stock, a leading provider in the Financial Close market, from Equalweight to Overweight and increased the price target to $70.00 from $60.00.
The firm indicated that BlackLine's current trading position, at a discount of more than 35% compared to its peers, presents a favorable outlook for the company.
The optimism from Morgan Stanley is rooted in the anticipation that BlackLine's margin expansion trajectory is not fully appreciated by the market. The firm suggests that BlackLine's management is likely to revise their margin targets upward at the upcoming Investor Day on November 19th.
This expectation is based on the company's performance, which already meets or is close to previously set targets, despite a lower growth profile today compared to when these targets were initially established in 2022.
Morgan Stanley has consequently raised its Free Cash Flow (FCF) estimates for BlackLine to the highest levels among Wall Street predictions. It projects a 32% compound annual growth rate (CAGR) in FCF through 2026, with FCF margins reaching 22%, 25%, and 29% for fiscal years 2024, 2025, and 2026, respectively.
The financial institution's analysis points to BlackLine's stock trading at approximately 13 times the enterprise value to CY26 Free Cash Flow based on the new FCF estimates. This valuation is significantly lower than the roughly 19 times average of SMID-cap peers, leading Morgan Stanley to conclude that investors might not be fully recognizing the company's potential for margin growth.
In other recent news, BlackLine reported a significant uptick in Q2 2024 earnings, boasting a revenue of $161 million and a non-GAAP net income of $43 million. The company's strategic product portfolio, particularly in consolidation and financial analytics, had a strong quarter.
In further developments, BlackLine appointed David Henshall, an individual with a rich background in enterprise software and financial management, to its Board of Directors.
Additionally, Baird maintained a positive outlook on BlackLine, reaffirming an Outperform rating and a price target of $65. The firm anticipates potential share price growth towards the end of the year, based on upcoming events such as the analyst day.
Investment activity also saw some shifts, with Soros Capital Management selling off its stakes in Microsoft (NASDAQ:MSFT) and Advanced Micro Devices (NASDAQ:AMD), while Jana Partners established a new position in BlackLine Systems, owning nearly a 2% stake. The Saudi Public Investment Fund increased its U.S. stock holdings to roughly $20.7 billion by adding call positions in PayPal (NASDAQ:PYPL), Microsoft, and Meta Platforms Inc (NASDAQ:META).
Looking ahead, BlackLine expects a total GAAP revenue for Q3 to be between $162 million and $164 million, indicating an 8% to 9% growth. These are the recent developments in the company's financial performance and strategic initiatives.
InvestingPro Insights
Recent data from InvestingPro aligns with Morgan Stanley's optimistic outlook on BlackLine. The company's revenue growth of 11.94% over the last twelve months and a strong gross profit margin of 75.39% underscore its solid financial performance. This robust top-line growth and profitability support Morgan Stanley's expectation of potential upward revisions in margin targets.
InvestingPro Tips highlight that BlackLine operates with a moderate level of debt and has liquid assets exceeding short-term obligations, which could contribute to the company's ability to expand margins and generate stronger free cash flow, as projected by Morgan Stanley. Additionally, the tip indicating that net income is expected to grow this year aligns with the analyst's positive outlook on BlackLine's financial trajectory.
It's worth noting that InvestingPro offers 7 additional tips for BlackLine, providing investors with a more comprehensive analysis of the company's financial health and market position. These insights could be particularly valuable in light of Morgan Stanley's upgrade and the upcoming Investor Day on November 19th.
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