ServiceTitan Made Waves in Its IPO, But Is Stock a Buy?

Published 01/13/2025, 11:15 AM
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One of the hottest stocks to have its initial public offering (IPO) recently is tech company ServiceTitan (NASDAQ: TTAN). The software company made headlines after its valuation jumped over 42% on its first trading day. However, since its one-day change on Dec. 10, the share price has stagnated, down 1%. On average, Wall Street analysts are still bullish on the name. So, what exactly does ServiceTitan do, and what is the reason for such excitement around the company? I’ll answer those questions and provide my thoughts on the company going forward.

ServiceTitan: Bringing Technology to the Trades

ServiceTitan finds itself in an interesting space. It looks to integrate sophisticated software into industries that have gone years without it. ServiceTitan and many others refer to these industries as “the trades." It includes people who work in plumbing, roofing, landscaping, carpentry, and similar jobs. ServiceTitan’s founders were the sons of trades business owners. They noticed that low-value, repetitive tasks were wasting their parents' time. It hurt their ability to grow the business. They developed ServiceTitan software to meet the needs of tradespeople. It helps them scale and run their businesses more efficiently.

The cloud-based software provides a variety of functions. It includes sales, marketing, and customer service. It also extends to scheduling and assigning jobs, tracking inventory, HR management, and payment processing. Overall, it appears to be a one-stop shop where tradespeople manage their business. The software uses AI to automate processes within these functional areas and lead its customers to the best business opportunities.

Customers clearly like the product once they use it. The company has retained 95% of its customers over each of the last 10 quarters. Those customers are also spending more. The company’s net retention rate is over 110% for the past 10 quarters. This means that, on average, the spending from existing customers has increased by 10% each quarter.

Revenue Streams, Addressable Market, and Growth Strategy

The company generates revenue primarily through software subscriptions and usage-based revenue from payment processing. Subscription revenue was $138 million in Q2 2024, while payment revenue was $47 million. They contributed 71% and 25% to total revenue; professional services revenue made up the rest. Payment volume adds an important driver of revenue growth. As ServiceTitan helps its customers expand their revenues, the amount of payment processing going through the software also increases. This creates a feedback loop and directly aligns ServiceTitan’s interests with those of its customers.

Over the 12 months ending July 31, 2024, ServiceTitan generated $685 million, with revenue growing 24% in the most recent quarter. Overall, ServiceTitan is targeting a total addressable market of $13 billion. The company has been improving its margins substantially but still has a long way to go on a non-adjusted basis. For the six months ending July 31, its operating margin was -24%, but the adjusted margin reached 5%.

The company is looking to expand into its large addressable market by increasing the gross transaction volume (GTV) that goes through its platform and selling add-on products over time. It aims to expand GTV by serving larger customers and expanding its client base into different types of trades.

ServiceTitan: Strong Long-Term Bull Case With Short-Term Risk

Overall, ServiceTitan has a very strong business. The clear customer satisfaction shows that companies are getting significant value from it. The large total addressable market is a huge opportunity. The strong feedback loop between customer success and ServiceTitan's success is also a sticking point.

Growing the business by targeting larger customers would make a huge difference if successful, but it could be challenging. Larger players likely already have significant efficiency built in that smaller players don’t. The company notes the rise of private equity firms in this industry. Boosting efficiency is their calling card. Whether they will look to drive efficiency themselves or contract it out to ServiceTitan is the question.

ServiceTitan is also still significantly unprofitable on a non-adjusted basis. The company is notably trading at elevated valuations versus similar software companies. Still, the long-term case for this stock is strong, although, in my opinion, waiting for a better entry price could make sense. This is especially true given the first-year struggles many newly public stocks often face. The average of 12 price targets released since the IPO implies an upside in the shares of 16% versus the Dec. 9 closing price.

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