What a brutal six months it’s been for nCino. The stock has dropped 41.3% and now trades at $23.91, rattling many shareholders. This was partly driven by its softer quarterly results and 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 with the cheaper entry price, we're cautious about nCino. Here are three reasons why we avoid NCNO and a stock we'd rather own.
1. 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 6.6%, a deceleration versus its 25.4% annualized growth for the past three years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.
2. 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 60.1% gross margin over the last year. Said differently, nCino had to pay a chunky $39.93 to its service providers for every $100 in revenue. 
3. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
nCino’s expensive cost structure has contributed to an average operating margin of negative 3.4% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if nCino reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.
Final Judgment
nCino isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 4.8× forward price-to-sales (or $23.91 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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