Painful day for nCino reinforces problems facing its investors (NASDAQ:NCNO)

August 28 turned out to be a very bad day for shareholders nCino, Inc. (NASDAQ: NCNO). This is because the day before, after the market closed, the management team of the business announced coverage of the financial results the second quarter of the company’s 2025 fiscal year. Even though revenue and adjusted earnings per share were higher than anticipatedGAAP earnings were below expectations. Revenue forecasts for the third quarter of 2025 point to slower top-line expansion in the near term than what analysts had hoped to see. Those factors sent shares down about 13 percent in midday trading.

That might seem like an overreaction given how the company fared overall for the quarter. But that’s the problem with investing in expensive firms that are still having trouble achieving profitability. That was my concern when I reaffirmed my “sell” rating on stock in one article published in March of this year. Even though the company posted stellar results in the last quarter of fiscal 2024, the stock looked “vastly overvalued.” Since then, the “sell” rating has worked pretty well. Shares fell 15.8%, while the S&P 500 (SP500) is increasing by only 6.5%. The difference in return is even more drastic when you think about me original “Sell” rating on the stock as of September 2022. Since then, the stock has fallen 16.5%, while the S&P 500 has risen 36.8%.

Even if the company continues to grow at a good pace, I don’t see the picture changing enough to warrant an update. Because of this, I am keeping my rating for the firm as is.

Mixed results are a problem for growth stocks

For those unfamiliar with nCino, the company operates a software-as-a-service (or SaaS) platform dedicated to serving financial institutions of all sizes. The cloud-native platform focuses on the banking sector and is dedicated to facilitating things like customer onboarding, deposit account opening, loan origination and more. It provides customers with data analytics and even offers those customers a suite of end-to-end mortgage solutions. In March of this year, the business even acquired a firm called DocFox for $75 million. This solution helps automate onboarding experiences for commercial and business banking firms.

Even recently, the kind of growth the company has shown has been impressive. Take the most recent quarter as an example. Revenue for the second quarter of fiscal 2025 was $132.4 million. That’s up 13% from the $117.2 million generated just a year earlier. Although the company enjoyed slight growth in professional services and other revenue, most of that gain came from its subscription services. Sales increased 14% from $99.9 million to $113.9 million. This increase was primarily driven by higher revenue from existing customers as they increased their exposure to nCino’s solutions. However, 48% of the growth in subscription revenue came from customers who did not contribute to subscription revenue at the same time last year. This means new customers, for the most part.

To my chagrin, management does not provide any quarterly details on the number of customers the business has. I don’t think it would be useful to repeat the details of my previous article mentioned above. But in it, we provided a breakdown of the company’s total customers. In particular, we noted the number per solution the company offers and the share of those that account for more than $100,000 and those that account for more than $1 million individually in revenue for the firm.

In conclusion, management also achieved improved results. The company went from generating a net loss of $0.14 per share in the second quarter of 2024 to generating a net loss of $0.10 per share in the same period this year. This improved the company’s net loss from $15.9 million last year to $11 million this year. It’s worth noting that official earnings per share came in $0.02 less than analysts were hoping to see. On an adjusted basis, the improvement was from a profit of $0.09 to a profit of $0.14. This took adjusted net income from $9.9 million to $15.8 million. Adjusted earnings per share reported by management managed to come in $0.01 above what analysts were expecting.

To be honest with you, I’m not a big fan of using these adjusted numbers. For some companies I’m fine with that, but for this one I’m not because of the large amount of stock compensation added back. When you include stock-based compensation (“SBC”) that represents a significant amount in adjusted results, you no longer reflect what results might be if no reasonable adjustments were required. Instead, you focus on trying to get something closer to cash flow. In this case, only cash flow analysis makes more sense.

Speaking of cash flows, the firm saw a year-over-year decline from $12 million to just $5 million. But if we adjust for changes in working capital, we get a near doubling from $12.8 million last year to $21.4 million this year. Meanwhile, EBITDA for the company improved from negative $2 million to positive $1 million. In the chart above, you can also see financial results covering the first half of 2025 compared to the same period in 2024. As was the case for the second quarter itself, the first half of this year looks significantly better better than it was for fiscal year 2024.

In addition to missing GAAP earnings expectations, the company also provided guidance for the third quarter of fiscal 2025 that is lower than what pros had hoped to see. Management currently anticipates revenue for that quarter between $136 million and $138 million. That compares with estimates of $138.7 million. There’s also a chance that earnings per share will be lower than analysts were hoping to see. Management is currently guiding for adjusted earnings per share between $0.15 and $0.16. However, analysts expected to see at least $0.16 in adjusted earnings per share.

As disappointing as the guidance for the third quarter was, there was positive news when it came to expectations for 2025 as a whole. Adjusted earnings per share should be between $0.66 and $0.69 In the middle, this is slightly above the $0.67 expected by analysts. However, this will be based on revenue between $538.5 million and $544.5 million, with a midpoint of $541.5 million. Meanwhile, analysts were expecting revenue of $541.7 million for the year.

These may look like rounding errors. And in principle, I would agree with that assessment. However, this is the problem when it comes to growth investing. Don’t get me wrong. Growth investments can lead to tremendous upside. But when things don’t go exactly the way the market wants, a significant downside can result.

I refer to nCino as a growth candidate not only because of its attractive revenue expansion, but also because of the share price because of it. If we take management’s estimate for adjusted earnings for this year in the middle, we should anticipate adjusted net income of $77.7 million. Annualized adjusted operating cash flow should result in approximately $128.8 million this year. And even if we give management slack and add stock-based compensation, EBITDA for this year should be about $129.2 million.

Using these estimates, as well as historical figures for 2024, we can see how the company’s stock is valued in the chart above. Due to the anticipated growth and the fact that the company has net cash on hand of $18.7 million, the forward EV to EBITDA multiple is no longer at atmospheric levels. The same is true for the price at the adjusted operating cash flow figure. But even on that basis, the stock is very expensive.

To put into perspective how much cash flow NCNO would have to generate to be priced right at a multiple of adjusted operating cash flow of 10, 15 or 20, or rightly valued at an EV multiple to EBITDA included between 10, 15, or 20, I created the chart below. Even using the more aggressive assumptions, the stock is still a long way from being correctly valued, let alone undervalued.

Take away

I can honestly appreciate the continued growth that the management team at nCino is achieving. In the long term, I fully expect this trend to continue. That said, this recent price drop further illustrates how volatile the market can be. Some investors may see this as a buying opportunity. But for me, shares of nCino, Inc. they are still very expensive. With this in mind, I have decided to keep the company rated ‘sell’ for the time being.