HashiCorp, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A cloud software company that provides a multi-cloud infrastructure for applications, enabling organizations to manage their cloud operations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

HashiCorp’s business revolves around providing software products that enable companies to manage their infrastructure across multiple cloud environments.

The company operates in the rapidly expanding cloud infrastructure market, which is fiercely competitive.

Business Overview

HashiCorp is a cloud software company founded in 2013 with a mission to provide consistent workflows across various cloud environments. The company’s software enables organizations to manage their infrastructure in hybrid, public, and private clouds. Their products are offered as self-managed software, through SaaS offerings, or as open-source and enterprise versions.

The company’s products can be divided into the following categories:

  1. Infrastructure Provisioning Products: Terraform
    • Automates provisioning and managing infrastructure (compute, storage, networking) across cloud environments.
  2. Security Products: Vault
    • Enforces authorization to access sensitive data and provides data protection through strong encryption and key management capabilities.
  3. Application Delivery Products: Consul
    • Enables the secure and dynamic communication between services and applications.
      1. Workload Orchestration: Nomad
    • Facilitates flexible and automated deployment of containers, applications, and workloads.

    The company primarily focuses on large enterprises with complex cloud infrastructure. As a result, its target customers are organizations with significant IT needs and often those adopting a multi-cloud strategy. HashiCorp products serve various roles within a cloud environment, often at a stage when companies are transitioning from on-premise to more advanced infrastructure solutions.

The cloud infrastructure market is rapidly evolving, with many competing solutions.

  1. Growth in multi-cloud adoption: Many companies use several different cloud providers (e.g., AWS, Azure, and GCP) for their infrastructure needs and this has been the main driver of HashiCorp’s product popularity. HashiCorp’s products can streamline managing those complex multi-cloud operations.
  2. DevOps movement: Automation of development operations is becoming the standard and companies are looking for better ways to automate these processes. HashiCorp’s products are helpful in automating these processes.
  3. Cybersecurity challenges: As cybersecurity threats increase, demand grows for more security and data governance solutions. This has increased usage of HashiCorp’s vault security product.
  4. Shift to cloud computing: Companies are migrating their infrastructure to the cloud to benefit from its elasticity, efficiency, and cost-effectiveness, so tools like HashiCorp are essential.

While HashiCorp operates in a fast-growing market, it faces strong competition from the following:

  • Cloud providers offering their own infrastructure automation and security tools (AWS, Azure, GCP). The largest cloud companies are often a direct competitor, however companies need multi-cloud solutions since most companies use multiple cloud providers at the same time.
  • Open-source alternatives: Some products face competition from open-source tools such as Kubernetes.
  • Specialized software vendors: There are various competitors focused on specific areas that the tools of HCP target. Examples include Chef, Puppet, Ansible, and CyberArk.

Despite this competition, HashiCorp has certain advantages: It’s known to offer consistent workflows and control across different clouds, it focuses on a strong developer community, which helps increase product adoption and usage, and that it has strong relationships with cloud providers through integrations and partnerships. These points will be further discussed in the Moat rating section below.

Key Financial Metrics

Revenue Distribution and Growth

HashiCorp’s revenue primarily comes from subscriptions to its software products and related services.

  • Subscription revenue is recognized ratably over the contract terms, and customer contracts tend to be multi-year.
  • They also generate revenue through professional services, including implementation and training for their products. This is becoming a smaller part of the overall revenue.

HashiCorp has experienced strong revenue growth in recent years, with revenues increasing to $515.2 million in FY 2024, up from $371.7 million in the previous year which represent an impressive growth rate of more than 38%. However, the rate is slowing down. The company expects revenue for Q1 FY25 to be in the range of $145 million to $147 million.

Profitability

  • Gross profit is strong, at around 80%, indicating a high proportion of revenue that remains after accounting for the direct costs of services. However, operating losses are significant because of high sales and marketing and research and development expenses. * Net income and earnings per share are negative as of current filings, which is not unexpected for a growing cloud company. * The company has a path towards profitabilty, where by end of FY25, the company plans to cut its operating losses to less than 10%. The company also believes their long-term business model will create profitability.

Key Ratios

  • Gross margins were 82%, 79% and 77% for Q1 of fiscal year 2024, 2023 and 2022, respectively. There is a slight increase over the years.
  • Remaining Performance Obligations (RPO) were at 766 million, 747 million and 637 million, as of Q1 of fiscal year 2024, 2023 and 2022, respectively. The increase shows that contracts for services are increasing over the years. * Net Dollar Retention Rate (NDRR) has slightly decreased over time, with a NDRR of 126% at the end of FY23. This means that they are generating more revenue over time from their existing customers. * The Company has a revenue model of subscription and therefore has highly visible growth, especially in times of increased adoption of cloud technology.

Moat Rating: 2 / 5

HashiCorp is not yet a strong moat company, but possesses some elements that may lead to building a moat over time.

  • Intangible assets: HashiCorp has a well known brand among developers in the cloud community. As a result of this, most people familiar with the cloud ecosystem recognize and are familiar with the brand and its products.
    • However, the brand doesn’t translate well to a broader corporate landscape, or to the C-suite.

  • Switching costs: Switching from HashiCorp’s tools to competitors can be difficult and time-consuming because of a combination of factors. Moving data and infrastructure from HashiCorp products can be difficult and could result in disruptions. A lot of integrations need to be redone, and there are usually significant switching costs. Because of the complexity of cloud environments and operations, companies often hesitate to switch their solutions, even if another solution is cheaper. * However, the switching costs can be easily mitigated by a new offering by a different company that provides better integration across other tools.

  • Network effects: HashiCorp has a strong community around its open-source products. Because most developers prefer open-source over other vendors, this also helps with adoption and the products get better, quicker. Therefore, the more people that use the tools, the better the tools get. The growing user base makes it harder for competitors to attract developers to a new solution. * The network effect isn’t very powerful for HashiCorp as there is no exclusivity to the network. They are open to everyone and therefore competitors can use similar methods to gain a market share.

  • Cost and Capital Efficiency: Although some of its products are complex, the company is not a capital-intensive business. It doesn’t have high capital requirements (like manufacturers and retailers), so the main expense is employee and R&D related. Since it has a lot of expenses related to its workforce, it becomes harder to create a cost advantage over a company that is better managed than HCP.

Conclusion: Although the company has strengths in its brand and network effect, and customers can face high switching costs, its moat is not wide and is limited by strong competitors in the cloud market and other related software companies. A narrow moat may become a wide moat as more companies embrace cloud adoption.

Risk Factors

HashiCorp faces several risks that could impede its moat and business performance.

  • Intense competition: The cloud infrastructure space is highly competitive and has many well-funded competitors, including the big cloud providers. Because the cloud market is a fast-growing market, competition can increase significantly and eat into the company’s profitability. * It is easy for a better and more innovative company to take away market share since most of their products are based on new and emerging technologies that have not been widely used, therefore are not well understood.
  • Technological Disruption: Technological advancements may render their current solutions obsolete. Because they sell their technology to other companies, technological disruptions that can hurt others can also hurt the company. The rapid evolution of cloud technology may require constant upgrades, which will limit their profitability if they cannot keep up.
  • Execution Risk: As the company relies heavily on innovation and strong management, execution risk may pose a threat. If management is not able to continue growing and developing, or if they have to deal with unforeseen circumstances that can be disruptive, their business may take a hit.
  • Dependency on Cloud Providers: As their product interoperability depends on different cloud platforms, they are at the whim of how the providers may decide to operate. Any major change in cloud providers technology or rules may have significant repercussions on HCPs products.
  • Customer Concentration: Some of their customers are large companies which are crucial to their growth. In addition, these big clients also have a high power of negotiating with the company due to their large volume, therefore, the company may suffer from these few clients.
    • The company itself has very little to no control over these large companies and their decisions.

Business Resilience

Despite facing multiple challenges, the company has strengths that may enable it to withstand economic shocks and other issues.

  • Growing Market: The demand for multi-cloud infrastructure is steadily growing, which creates a big opportunity for the company. As long as they can perform and be consistent in their product offerings, growth would continue. * The product category that the company is in is extremely important, and it may potentially be the future, therefore, has a lot of potential to grow exponentially, even with high competition.
  • Recurring Revenue Stream: Their subscription model is a very solid revenue stream as long as they can retain their customers. If successful, the subscription model ensures a certain amount of predictable revenue. * The company has seen good growth in their net dollar retention rate, meaning they are generating more income over time from their existing customers.
  • Strong Customer Relationships: Many companies rely on HashiCorp’s products for mission-critical infrastructure operations, which builds long-term customer relationships with good retention rates. The company has an extremely high retention rate with their clients, because switching costs are very high for cloud infrastructure.

Understandability Rating: 3 / 5 

 The company's business model is relatively complex due to its range of interconnected products and its reliance on various cloud-based infrastructure. Most users may not know or understand how the products actually work and therefore understanding may become complicated. However, at a high level, the business model is easily understood and what the company is trying to achieve can be summarized simply.
   
  Therefore, the understandability rating is 3 out of 5.

Balance Sheet Health Rating: 4 / 5 

HashiCorp’s balance sheet is relatively healthy, with an adequate amount of liquidity and capital structure. The company has relatively high amounts of cash reserves (around $1.3 billion in short-term investments), which helps weather any downturns. Moreover, their liabilities are under good control and the debt-to-equity is relatively low.

Therefore, balance sheet health is 4 out of 5.

Recent Concerns

  • Unprofitable growth: In recent years, despite strong growth, the company has not been profitable. It is not unusual for tech companies to initially lose money, however, it is important that they start reducing losses over time. The management expects a path towards profitability by the end of FY25 where their operating losses would be below 10%.
  • Competition: As previously mentioned, the cloud market is highly competitive and there is no guarantee that the company can maintain its dominance against its powerful competitors.

In earnings calls, the management emphasizes that their primary focus is on product development and building on their existing client base. They believe that these will translate into revenue growth and ultimately profitability. They are not overly concerned with market forces and believe they can keep up with demand for cloud-related services. They have also shown confidence in their ability to become profitable over time.