Klaviyo's (KVYO) year-over-year revenue growth in Q3 places it in "rare air" among software companies, but early look into 2025 dynamics show that ongoing investments are limiting operating margins, Morgan Stanley said in a note Thursday.
The analysts said that despite the company's ability to sustain 34% year-over-year revenue growth as it approaches a billion-dollar revenue run rate, investor sentiment has been dampened after Q3 due to a few factors. This quarter's revenue beat was smaller at 4%, compared to Q2 at 5%, net revenue retention, NRR, dropped 2 percentage points to 110%, and early full-year 2025 guidance suggests continued NRR decline, which could slow revenue growth further from the 27% to 28% guidance for Q4.
"Given this track record, turning the dial further on investments would appear to be the correct strategic decision, despite the near-term pressure on operating margins. Bottom line, with Klaviyo proving out an ability to well sustain top-line growth despite the uneven small and medium-sized businesses backdrop and well expand up-market, investments behind that growth are warranted," the analysts said.
The analysts added that the company's management plans to continue investing into 2025, given the success of its marketing and product efforts this year, and as a result, it expects operating margins in full-year 2025 to stay similar to those in 2024.
Morgan Stanley raised Klaviyo's price target to $38 from $32, while keeping its equalweight rating.
Shares of the software firm fell past 15% in recent trading.
Price: 34.03, Change: -6.33, Percent Change: -15.68
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