Upward Estimate Revisions May Continue At New Relic, So Buy In: D.A. Davidson

In a report published Wednesday, DA Davidson analyst Jack Andrews upgraded the rating on New Relic Inc NEWR from Neutral to Buy, while raising the price target from $39 to $43. The analyst believes given the recent decline in the share price and increased confidence in the company's ability to execute, the stock offers an appealing entry point at the current levels.

"Our research indicates that NEWR's vision of software becoming a strategic weapon is increasingly resonating in the marketplace. With the world at large collectively spending more time in front of software, every business's brand, reputation and customer experience is directly linked to its software," Andrews stated.

Early adopters of New Relic's vision tend to be companies that operate in sectors that are seeing significant change. The analyst believes that the adoption of the company's products is likely to continue in a similar manner by "forward thinking companies," in the longer term as well. This essentially means that New Relic's addressable market is also expanding meaningfully beyond legacy solutions.

According to the DA Davidson report, "Other trends currently benefiting NEWR's product positioning include the desire of customers to have a single integrated cloud platform that can provide visibility across an entire heterogeneous IT environment and the goal of customers to have a performance manager that is independent from the underlying service provider."

The analyst believes that the best indicator of customer satisfaction is that New Relic's net dollar retention rate continues at about 30 percent, which points to existing customers continuing to grow at 30 percent net of churn.

Given the company's subscription model and accelerating momentum in the underlying business from larger deal sizes and new product growth, the analyst believes that the consensus revenue forecasts for FY2016 could prove to be conservative.