Klaviyo is down after solid first earnings results as a public company. Here's what you need to know

The IPO market remained subdued in 2023 due to macro and financial uncertainties, with only 153 IPOs on the US stock markets, marking a 15% decrease from 2022. However, the market rebound attracted some large names this year, and Klaviyo ($KVYO) is one of them.

The multibillion-dollar software company went public in late September in a highly successful public offering, with the stock rising as much as 32% on its first day of trading. However, it has fallen about 14% since then.

Klaviyo released its first earnings report as a public company in November. Even though it beat analyst estimates and provided an upbeat outlook, the stock failed to recover. This is actually a pretty common reaction to newly listed names like Klaviyo, due to the high volatility in the first couple of months of trading. But if the company continues to deliver solid results in the quarters ahead, the stock could reward shareholders. If it fails to overdeliver, Wall Street may punish the stock due to its pricey valuation. Here’s what you need to know.

Advanced Digital Marketing Automation

Klaviyo, founded in 2012, has rapidly established itself as a front-runner in the digital marketing automation space. As of Q3, this innovative company boasts over 135,000 customers, up 20% y/y, with its primary focus in the e-commerce sector.

This rapid expansion is a result of Klaviyo's unique approach to digital marketing. Unlike traditional platforms, Klaviyo offers a more personalized and data-driven marketing experience. It harnesses the power of data to allow businesses to create more targeted and effective marketing campaigns. This strategy is particularly appealing in the e-commerce world, where understanding and responding to consumer behavior is key to success.

Klaviyo's platform integrates seamlessly with a multitude of e-commerce platforms, including Shopify ($SHOP), Magento, and BigCommerce ($BIGC), among others. This integration capability allows for the smooth collection and analysis of data, which in turn enables businesses to craft tailored email and social media marketing campaigns. The platform's ability to automate and personalize communication based on customer behavior and preferences sets it apart from competitors.

Klaviyo’s personalization capabilities are powered by AI. AI plays a crucial role in how the platform transforms vast amounts of data into actionable insights for businesses. One of the platform's standout features is its predictive analytics. By leveraging AI algorithms, Klaviyo can predict future customer behavior, such as the likelihood of a customer making a purchase or the potential lifetime value of a customer. This predictive power enables businesses to tailor their marketing efforts more effectively, focusing resources on high-potential customers.

Another area where Klaviyo's AI shines is in its segmentation and personalization capabilities. The platform can automatically segment customers based on their behavior, preferences, and purchase history. This segmentation allows for highly personalized marketing campaigns. For instance, if the AI identifies a segment of customers who frequently purchase a specific type of product, businesses can target this group with specialized offers or content, significantly increasing the chances of conversion.

Email marketing, a critical component of Klaviyo's service, is also enhanced by AI. The platform can optimize email send times for each individual recipient based on when they are most likely to engage. This level of personalization is not feasible at scale without the use of advanced AI algorithms.

Despite the post-pandemic slowdown in e-commerce, Klaviyo continues to grow very rapidly, a sign that the company is gaining market share in the large and growing e-commerce space. It also highlights the strong and increasing demand for advanced digital marketing automation tools in this increasingly competitive market.

Solid Financial Performance Amid A Challenging Economic Backdrop

Klaviyo is performing well despite the growth challenges that e-commerce firms are facing. This is because the platform delivers a high ROI, which makes it a must-have tool for merchants who want to remain competitive. The hyper-growth of large customers confirms the significant ROI of the y/y to 1,699, while total customers increased by 20% over the same period. This demonstrates that customers, particularly the larger ones, are aggressively increasing their spending over time, attributable to the significant value they derive from the platform.

The rapid customer growth led to a 48% revenue growth in Q3, to $175.8 million, making Klaviyo one of the fastest-growing SaaS companies on the market. The company also reported a Net Retention Rate of 118% during the quarter, the tenth consecutive quarter of an NRR of over 115%, which is a very healthy retention rate.

Strong growth aside, Klaviyo is delivering significant operating leverage thanks to its efficient growth strategy. As you can see below, in Q3, sales and marketing expenses fell to 32% of revenue compared to 44% in the year-ago quarter. This is great marketing leverage, suggesting a healthy and sustainable growth engine.

Klaviyo's partner ecosystem plays a crucial role in driving its efficient growth. This ecosystem, comprising a network of partnerships with various e-commerce platforms, digital agencies, and technology providers, significantly amplifies Klaviyo's market reach and enhances its product offerings, contributing to the company's scalability and success.

One key component of Klaviyo's partner ecosystem is its integration with major e-commerce platforms like Shopify, Magento, WooCommerce, and BigCommerce. These integrations allow Klaviyo to tap into a vast customer base, as these platforms are used by a large number of e-commerce businesses ranging from small startups to large enterprises. This accessibility not only streamlines the process for e-commerce businesses to adopt Klaviyo's services but also ensures that Klaviyo is a go-to option for businesses looking to enhance their marketing efforts.

The significant operating leverage during Q3 helped Klaviyo achieve an adjusted operating income margin of 10%, a notable improvement compared to the -14% margin a year ago. This operating leverage is likely to continue next year, given the lack of IPO-related expenses that affected profitability in the most recent quarter.

What About Valuation

The main reason Klaviyo stock didn’t spike after the release of the solid Q3 earnings is the company’s relatively pricey valuation. At current prices of around $28 per share, it trades at a PS ratio of 11.4x, an expensive multiple for an unproven software stock in a high-interest-rate environment.

Klaviyo’s PS ratio has the potential to rise to 15x or even higher if the company over-delivers, but it could fall under 10x if it underdelivers. Right now, Klaviyo is probably a hold or moderate buy for more risk-tolerant investors as it needs to prove to Wall Street that it’s an elite SaaS company that deserves a premium valuation.

What Else

Klaviyo has bright growth prospects thanks to its significant market share in the digital marketing automation space and its innovative AI-powered platform. The company seems well-positioned to benefit from the growing demand for personalized marketing solutions. However, Klaviyo faces stiff competition from other digital marketing automation specialists like Mailchimp, HubSpot ($HUBS), Adobe Marketo Engage, and others. All of its main competitors are deep-pocketed publicly listed companies that can potentially develop more advanced solutions than Klaviyo and steal market share. Given the stiff competition, the relatively high valuation, and the execution uncertainty, I would rate Klaviyo as a 'hold' or a 'moderate buy' for more aggressive investors.

I’ve no positions in the stocks mentioned.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.