Is Billion Dollar Hedge Fund Voss Capital Crazy About SolarWinds (SWI)?

In the world of high-stakes investing, hedge funds often bet big on companies they believe have untapped potential. One such fund, Voss Capital, has caught the attention of investors with its bullish stance on SolarWinds (SWI), a provider of information technology management software. But is Voss Capital's enthusiasm for SolarWinds justified, or is the hedge fund barking up the wrong tree?

Voss Capital, with assets under management totaling over $1 billion, has been vocal about its support for SolarWinds. In its first-quarter 2024 investor letter, the fund highlighted SolarWinds as a stock with significant upside potential. But why is Voss Capital so bullish on this software company, and should investors follow suit?

SolarWinds' transformation from a pure license/maintenance provider to a subscription model has been a key driver of Voss Capital's optimism. Despite the headwind of lost upfront license sales, the company's revenue growth has begun to accelerate, with margins rising concurrently. This shift has led to approaching 50% EBITDA margins and 90% gross margins, as well as accelerating ARR growth now above 7%. These impressive metrics have earned SolarWinds a high "Rule of 40" score, making it an attractive investment opportunity in Voss Capital's eyes.



Voss Capital's bullish stance is also supported by SolarWinds' consistent earnings revisions and expectation-beating performance. Over the past year, the company's 2024 EBITDA estimates have increased from $317 million to $375 million, reflecting analysts' growing confidence in its financial prospects. This positive revision trend, coupled with SolarWinds' history of consistently beating earnings expectations, suggests that the company is well-positioned for future growth.

However, not all analysts share Voss Capital's enthusiasm for SolarWinds. The stock has an average rating of 'Hold' and a mean price target of $13.79, according to analysts polled by StockAnalysis.com. This discrepancy in valuation highlights the debate surrounding SolarWinds' true potential.

Voss Capital has valued SolarWinds at $23 per share, attributing this to the company's accelerating ARR growth, high margins, and positive earnings revisions. The fund believes that SolarWinds is undervalued, trading at only 9x FCF, despite its strong performance. However, other analysts have a more conservative average price target of $13.79, with a 'Hold' rating.



In conclusion, Voss Capital's bullish stance on SolarWinds is driven by the company's impressive financial performance and transformation to a subscription model. While not all analysts share the fund's enthusiasm, SolarWinds' consistent earnings revisions and expectation-beating performance suggest that the company has significant long-term potential. As investors weigh the competing views on SolarWinds, they should consider the company's strong fundamentals and the potential for continued growth in the IT management software market. Ultimately, the decision to invest in SolarWinds will depend on each investor's risk tolerance and long-term investment goals.