Does Tableau's Valuation Make Sense?

Does Tableau's Valuation Make Sense?

Tableau Software is one of the hottest names in big data. The company helps businesses process, read, and react to data more effectively. But as investors take big bets on Tableau's future, is it possible that more upside can be found in peers Tibco Software or Qlik Technologies ?

What is big data?
Big data offers services that make life easier for a company's customers, creates platforms where information can be stored in the cloud, and gives businesses and their employees access so they can better interact, engage, and understand industry- and company-related data.

One segment of this space is called data visualization, and this is an area where Tableau has thrived in the last year due to its user-friendly platform. The company competes directly with other data-visualization companies like Tibco and Qlik.

A little perspective
There's no debating that Tableau had an exceptional quarter earlier this month: The company saw revenue growth of 94.9%, which was an acceleration from its prior quarterly growth of 90%.

Not to mention, in an industry plagued with intense competition and heavy spending, profits are rare. Yet, Tableau managed to earn a non-GAAP net income of $14 million, a very impressive feat.

However, regardless of Tableau's mind-boggling growth and its 1,800-plus new customers added in a three-month span, investors must still be concerned about its valuation.

Tableau saw quarterly revenue of just $81.45 million, and in 2014, analysts expect the company to take in $327 million in revenue. Yet, the stock trades at 17 times future sales.

To put this in perspective, Tableau's competitors Tibco and Qlik, combined, have a market capitalization of just $5.7 billion -- comparable to Tableau. But together, they are expected to generate revenue of $1.7 billion in 2014.

Essentially, Tableau is worth just as much as the combined valuations of two competitors that alone are significantly larger. Therefore, investors are taking massive bets on Tableau to not only maintain growth, but to own this data-visualization space in the future.

The problem is that Qlik and Tibco are not bad companies
Tableau's advantage is that it has become appealing to large customers, and that its platform provides interactive data that is easy to use. However, these companies all offer similar services at different prices, and platforms from all of these companies are becoming more user-friendly with time.

Qlik provides data-visualization platforms to small and medium-sized businesses to integrate and store data to be shared across various work groups and divisions. Thus, Qlik allows users to make more informed business decisions.

For this upcoming year, Qlik is expected to grow by 18%, with sales of $550 million. At 4.25 times expected revenue, it is much cheaper than Tableau. The only negative is that Qlik is not profitable, having an operating margin of near zero, due to high costs. However, peer Tibco is very profitable, with operating margins of almost 15%.

Tibco is a leader in business optimization and process management, providing platforms to integrate and analyze operational data. While its expected revenue growth is much smaller at 8%, this is a company generating more than $1.1 billion in sales, trading at just three times forward revenue.

As a result, given the size, value, and growth rates of these companies, it is hard to validate an investment in Tableau despite its rapid growth. In fact, investors must acknowledge that there are no guarantees Tableau will ever reach $550 million or $1.1 billion in annual sales, much less carry the growth rates of its peers Qlik or Tibco if the same fundamentals are ever earned.

Final thoughts
The business intelligence market is estimated to be worth more than $13 billion, and big data and cloud services are rapidly becoming a larger piece of this pie. With that said, Tableau is believed by many to be a top investment opportunity within this space in the years ahead. However, it is already priced for greatness, and is still very much unproven.

Investors might be better served by looking at one of Tableau's peers, such as Tibco or Qlik, two companies with impressive growth and valuations that still allow for further upside. However, given Tibco's impressive margins, 8% growth rate, and cheapest valuation multiple, it might be the safest and best investment for the future.

The bottom line: It appears Tableau has reached a valuation beyond reason, and most likely, this won't end well for investors who were late to the game.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Qlik Technologies and Tibco Software. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published