WalkMe – A Digital Transformation Stock

When artificial intelligence becomes pervasive, can we then stop talking about “AI startups?” The answer appears to be no. It’s becoming increasingly common to see companies tout their AI chops when it comes time to raise capital. “Artificial Intelligence Startup Leads Wave Of 4 IPO Candidates,” said Law360 which talks about the coming initial public offering (IPO) of an Israeli firm called WalkMe. Before we dig into their juicy S-1 filing document, let’s talk about “AI stocks.”

Defining an AI Stock

We’ve always believed the only way to prove a company is adding value by using AI is by demonstrating a product or a service that’s exponentially better than other alternatives, and that’s selling like hotcakes. Revenue growth – a proxy for capturing market share – is probably the best demonstration that a company has built something of value. At that point, does it really matter if they’re using AI? It does, and here’s why.

The core value proposition of an AI algorithm is that it constantly gets better over time. Think about how powerful that statement is. A tool that you use only gets better the more you use it. For that to happen, you need loads of delicious big data. All companies generate data exhaust, therefore all companies stand to benefit by applying AI to their (ideally proprietary) datasets. First movers should outlive their competitors because they have a head start, and they’ll quickly emerge as leaders. We invest in these leaders, then use the proceeds to buy a casa on the playa. That’s the general plan. So, how can we gauge how much value AI stands to provide for any given company?

Rather than try to assess the AI prowess of a company by looking at the number of AI engineers employed, or counting the number of “AI” mentions in their investor deck, we can try to answer a few simple questions.

  • What proprietary data is being generated?
  • How is that data being used to add value?

These are difficult questions to answer if a company obfuscates their business model behind a curtain of buzzwords.

Digital Transformation

When the first line of a company’s prospectus sounds aspirational and vague, you can be sure it’s only going downhill from there. Here’s the first line of the WalkMe S-1 filing.

Our vision is to fundamentally transform the productivity of humanity by harnessing the power of technology.

Credit: WalkMe

Pretty lofty stuff that’s better recognized by the buzzword of the decade – “digital transformation.”

You’ll often hear C-level types talk about digital transformation, which essentially means getting rid of the “we’ve always done it this way” stuff and replacing it with “something shiny and new” that ideally pleases both employees and customers. Salesforce refers to it as “reimagining your business,” and you can be sure that every CIO has a digital transformation slide in their deck right now. What that actually entails is unique to every company.

A Digital Adoption Platform

If you’re replacing a legacy “we’ve always done it this way” application with a modern Software-as-aService (SaaS) application, you’re undergoing digital transformation. That process only goes smoothly if you train people how to use the new applications. Usually, this involves someone from HR sending you a canned email with some outdated instructions that you should promptly delete if you know what’s good for you.

When Workday first came out, human resources professionals couldn’t get enough of it, never mind the platform was half baked and no hiring manager (the people who it was forced onto) could make any sense of it. In one instance, employees were asked to give feedback about their managers which – they were assured – was only meant for HR. Hilarity ensued when said feedback was sent directly to the managers. True story. Point is, you will not be able to effectively “digitally transform” anything if you don’t educate the end user properly.

That’s where WalkMe comes in, a company whose name stands for “walk me through it.” Here’s how it usually works when you call the IT helpdesk.

Source: Scott Adams

You can preempt that call by walking the end user through an application in real time, saving time, money, and most importantly, the sanity of everyone involved.

About WalkMe Stock

Click for company website

Founded in 2011, Israel’s own WalkMe took in just over $307 million in funding from investors before debuting their IPO which is slated to raise roughly $280 million in additional funding. All that money will be used to continue scaling WalkMe’s digital adoption platform which is best described as the ability to apply overlays onto any application with a simple no-code implementation. Here’s a very simple example where someone has created an instruction bubble in Salesforce just in case some of their users are half blind.

Credit: ScreenSteps

One might say that WalkMe is needed because the software wasn’t built properly in the first place, but the problem is much bigger than that. Every company has its own unique set of applications and business processes that often require some very customized instructions. Imagine how many application interactions are needed to onboard a new employee. That’s a perfect use case for a “new employee journey” where WalkMe overlays the application “Frankenstack” that every organization has cobbled together over the years. No need for developers, because everyone’s a “citizen developer” with WalkMe’s no-code solution. The end result is:

  • 60% reduction in training time for applications
  • 50% reduction in IT support costs and Help Desk tickets
  • 20% saving in software licensing fees

The platform is said to pay for itself in three months, and it’s also useful in customer-facing applications. Benefits include increasing customer retention, upselling them, and supporting them with less resources.

WalkMe isn’t the only firm dabbling in this space, but they’re way ahead of the pack, at least according to a $4,999 research report produced by Everest Group.

Credit: Everest Group

Says the report, “WalkMe holds more than half of the global revenue share in the Digital Adoption Platform (DAP) market.” We always want to invest in leaders, so WalkMe checks that box.

Few charts are more attractive than those that show a steadily increasing annualized recurring revenue (ARR) over time. As you may recall, ARR is the amount of money a company receives from their subscribers provided nobody cancels, the price of products doesn’t change, no new customers come on board, etc. You always want to see that number continuously grow over time.

Steadily growing ARR + giant blue ocean TAM = strong dopamine hit – Credit: WalkMe

WalkMe estimates their total addressable market (TAM) opportunity to be approximately $34 billion. The usual SaaS health metrics are provided, making the company’s progress easy to monitor over time. The 118% retention rate shows they can upsell existing clients. No single client makes up more than 3.3% of ARR. And the number of customers over $100,000 ARR and $1,000,000 ARR are 368 and 22 respectively. We now have sufficient information to make an informed investment decision.

WalkMe and Artificial Intelligence

The first mention of AI in the S-1 filing talks about “proprietary AI technology that recognizes user interfaces,” something anyone who used Rational Robot back in the late 90s is all too familiar with. The main reason WalkMe needs to recognize and understand a user interface is so that they don’t mess things up with their overlays. Their AI technology appears to have emerged in 2018 when WalkMe acquired DeepUI, a company in stealth mode that developed a patented machine learning technology that understands any business software at the graphical user interface (GUI) level, without the need for an application programming interface (API). Doesn’t sound nearly as sophisticated as, say, process mining, but it is a fundamental component of what they do.

The second mention of AI in the WalkMe S-1 is a reference to their “broad, rich dataset and AI/ML capabilities” which “proactively identify where users struggle, what users’ intent was in completing an action within an application or workflow, and where opportunities exist for automation of repetitive workflows.” There are plenty of robotic process automation (RPA) firms doing the latter. As for understanding the user better by mining process logs, that’s nothing new either. But we’re MBAs, not developers, and only a competent objective developer could assess how much value AI is really adding to WalkMe’s core value proposition.

To Buy or Not to Buy

We love SaaS business models that offer a solution that saves companies money, something that’s always in demand, even when there’s economic turmoil. To try and classify WalkMe as “enterprise AI” seems like a stretch. Going back to our earlier questions, we’re not sufficiently convinced the big data sets being generated are adding sufficient value for this to be considered “an AI stock.”

Tools that are used internally by organizations to increase productivity – to aid in digital transformation – are compelling, but we’re not actively looking for new stocks to invest in. Instead, we’re looking for reasons not to invest in a stock, and the biggest problem with WalkMe is trying to find their value proposition needle in a ginormous buzzword haystack. If we were to invest in the company, we’d do so only after the dust settles following their IPO.

If you’re thinking about pulling the trigger here, you’ll be pleased to know that shares aren’t unreasonably priced according to our simple valuation ratio.

  • 2.5 billion market cap / 0.154 billion annualized revenues = 16

Check this out. (Puts on sales hat.) This coming week we’ll be releasing valuation ratios for a select set of stocks in the Nanalyze Tech Stock Catalog. That way you can quickly and easily see how the number 16 compares to all the other SaaS companies you could buy instead. We’ll also be providing an update to our research methodology regarding a “valuation ratio cutoff” which is an objective (and admittedly primitive) way we can keep ourselves from buying overvalued stocks. It’s value adds like these that explain why Nanalyze Premium subscriptions have been selling like wildfire lately. (Takes off sales hat.)

Conclusion

Today’s investor no longer needs to ask “which companies use AI?” Instead, they should be asking “which companies don’t use AI?” and then avoiding them. There’s an expectation now that everyone should be using AI to create efficiencies, and implementing a chatbot doesn’t check that box. Nor does making a bolt-on acquisition of an AI startup and then telling everyone how you’re now an AI BSD. We like what WalkMe is doing, just not enough to buy the stock.

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