What Happened:
Shares of application performance management software company New Relic (NYSE:NEWR) jumped 14.9% in the morning session after the company announced an agreement to be acquired by Francisco Partners and TPG for $87 per share in cash, valuing the business at approximately $6.5 billion. The purchase price represented a premium of nearly 26% to New Relic's closing price on July 28, 2023. The acquisition is expected to make New Relic's transition to a consumption-based business easier and also improve its positioning in the observability market. New Relic has a 45-day "go-shop" period after the date of execution of the merger agreement, during which it can seek alternative acquisition proposals, and the Board of Directors can opt for a better offer. The deal is expected to be completed in late 2023 or early 2024.
Separately, the company reported first-quarter results that surpassed analysts' revenue and earnings per share expectations. Consumption revenue (usage-based) came in strong, growing by 39% year on year. Gross margin also improved, and the company generated strong free cash flow for the second consecutive quarter.
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What is the market telling us:
New Relic's shares are quite volatile and over the last year have had 14 moves greater than 5%. But moves this big are very rare even for New Relic and that is indicating to us that this news had a significant impact on the market's perception of the business. The previous big move was two months ago, when the stock dropped 5.97% on the news that the company reported fourth quarter results that beat analysts' expectations for revenue and earnings per share (EPS). Additionally, there was an improvement in gross margin, and the company generated strong free cash flow, bucking the trend of cash burn observed in the past two quarters. However, the revenue guidance provided for the upcoming quarter and the full year both fell short of Consensus expectations. Despite this, bottom line guidance remained strong, as the operating income guidance for the next quarter and full year exceeded estimates. The market seemed primarily concerned with the weak sales outlook. Nonetheless, management offered updates regarding the transition to a consumption-based model, which has impacted the topline.
New Relic is up 49.8% since the beginning of the year, and at $84.10 per share it is trading close to its 52-week high of $84.95 from May 2023. Investors who bought $1,000 worth of New Relic's shares 5 years ago would now be looking at an investment worth $860.70.
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