Big Data's Opportunity: Which Software Company Presents Value?

Investors are rushing to buy shares of Splunk and Tableau following 30% losses in the last six weeks. Both companies operate in the Big Data space, and have corrected during the Nasdaq's sell-off. However, in comparing both to peers like Verint Systems  and taking into consideration current growth, margins, and overall industry outlook, which presents a buying opportunity, if at all?

What is Big Data?
With global data rising rapidly, and more information being stored on the cloud, Big Data and analytics companies have become a hot commodity. The industry as a whole is growing fast and becoming large -- IDC estimates Big Data will be a $16.1 billion market this year -- yet is separated into infrastructure, services, and software.

Currently, and in looking ahead, software is growing the fastest within Big Data, and two of the most popular companies within this segment are Tableau and Splunk. Specifically, Tableau provides data visualization software while Splunk provides machine data analytics software; both give customers simple-to-use solutions to analyze, store, and utilize large amounts of data.

Mind-boggling growth rates
Given the overall size of the Big Data market, Tableau and Splunk are relatively small, generating less than $200 million in combined revenue during the fourth quarter of last year. Yet, as part of the software segment, both are growing at mind-boggling rates.

In the last quarter, Tableau saw revenue growth of 95% for $81.4 million, approximately 71% of its sales came from new licenses. This is important, as license revenue ultimately becomes maintenance, which is long term, and is key for Tableau to achieve sustainable growth. With that said, Tableau added a company-best 1,800 new customers in its last quarter, with 179 worth at least $100,000, a sign of longevity.

Splunk grew 53% in its last quarter to earn $100 million in revenue. Like Tableau, Splunk's licensing revenue sits at roughly 70% of total sales. As you can see, this is a very similar business model to Tableau, although Splunk's services are more expensive, which is why it added just 500 customers but still produced 53% growth.

Notable concerns
With all things considered, you'd think these two stocks would trade higher without ever hitting a bump. Yet, both have traded lower by more than 30% in the last six weeks. The reason for this loss derived from two fears: valuation and sustainability.

With regards to valuation, Tableau and Splunk trade at 18 and 24 times sales, respectively, and both have particularly high costs. Therefore, the question of whether either company will ever grow into its valuation is always asked and is why both have been hit so hard in the market sell-off. Furthermore, this question leads to the concern of sustainability. Specifically, Verint Systems is a competitor of Tableau, and indirectly of Splunk, with data visualization but also communication. Verint's market capitalization is about half that of Tableau, yet Verint has four times more annual revenue.

Not to mention, Verint has operating margins of nearly 14%, thus making it either exceedingly undervalued or implying that Splunk and Tableau are overvalued.

Where is the best value?
While both arguments against Splunk and Tableau are valid, and Verint looks to be a clear value investment, growth is a piece of the equation that must be considered.

Verint is a company that's growing at only 10%, and if we look back at the last 10 years, it has never grown at a rate that mirrors that of Splunk or Tableau. In fact, in 2006 Verint had revenue of $279 million, representing growth of 30%. Meanwhile, Tableau is near the same size, and it's growing at a near 100% rate. Hence, it might be safe to suggest that Tableau does have a transcendent service that'll ultimately create a massive company.

So, in regards to Splunk or Tableau, both are growing fast, but Tableau is growing faster, and is surprisingly doing so with efficiency. Splunk's operating margin has declined in each of the last four years, currently negative 25%. Tableau's margin increased in each of its last four quarters, including two profitable quarters to end the year, and a fourth-quarter operating margin of 11.2%, which is near equal to Verint.

Yet surprisingly with this improved efficiency, Tableau's year-over-year revenue growth has also accelerated in each quarter since its IPO in May of last year. Thus, Tableau truly is clicking on all cylinders, and all indications imply that it will one day soon be a highly profitable company.

At 18 times sales, Tableau is expensive, but given all that's been discussed, including growth, margins, and its comparison to Verint at similar stages in each business cycle, Tableau does in fact look like a company well-positioned for the future and a stock that could trade higher long term.

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