What a brutal six months it’s been for nCino. The stock has dropped 30% and now trades at $17.85, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in nCino, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is nCino Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons there are better opportunities than NCNO and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
nCino’s billings came in at $208.2 million in Q4, and over the last four quarters, its year-on-year growth averaged 10.2%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect nCino’s revenue to rise by 7.9%, a deceleration versus its 23.8% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.
3. Low Gross Margin Reveals Weak Structural Profitability
For software companies like nCino, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
nCino’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.8% gross margin over the last year. Said differently, nCino had to pay a chunky $39.24 to its service providers for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. nCino has seen gross margins improve by 0.9 percentage points over the last 2 year, which is slightly better than average for software.
Final Judgment
nCino isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 3.2× forward price-to-sales (or $17.85 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.
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