3 Reasons JPMorgan Downgraded Cornerstone OnDemand

Shares of Cornerstone OnDemand, Inc. CSOD fell more than 6 percent after JPMorgan downgraded the stock to Neutral on valuation, billings pressure and slower headcount growth.

The downgrade comes ahead of the company’s scheduled third quarter earnings. Wall Street expects a loss of $0.01 a share and revenue of $104.64 million.

Analyst Mark Murphy said shares of Cornerstone have reached his price target of $40 and thinks shares have "currently settled into a fair zone (5x EV/CY17 revenue) for a company with mid-20s% growth rate and reaching breakeven profitability.”

However, Murphy is concerned that billings would be pressured in the near-term due to weakening of British Pound, while his checks show possible slippage of deals in to fourth quarter. This assumes significance as he company has delivered 30 percent plus billings growth in six of the last 10 quarters.

Further, the analyst’s checks also points to a slow pace of headcount growth, which is good for margins but bad for revenues.

“Near-term, we are optimistic on revenue results/upside but carry a more conservative stance on billings growth, which impacts revenue on a lagging basis,” Murphy wrote in a note.

Meanwhile, Murphy shared important takeaways from his chat with a key contact in Cornerstone’s partner ecosystem. Among others, the partner indicated that the third quarter was an “okay [not terrible, nor stellar]” for his Cornerstone practice.

The partner noted that the fourth quarter would be great as some deals slipped from the third quarter to fourth and seeing “lots of activity” around Learning and Recruiting, which should benefit Cornerstone in the long run.

At last check, shares of Cornerstone fell 5.71 percent to $39.13.