I've talked ad nauseam about equities included in the Investor's Business Daily Top 50 List, and how they tend to crash and burn with even the slightest blemish in valuations in the quarter-to-quarter trading environment we're in. The recent price decline in Tableau just illustrates the point. The company graced the upper echelon of the IBD 50 until short-term traders opened the floodgates, and dumped whatever inventory they had on hand. Exhibit A is the right hand side of the above chart. The stock declined close to 20% in one day.
This is not a slight to the IBD 50. Far from it. We're currently in a market that pays up for growth, and holding periods are minimal on a historic basis. This trend will probably continue unless there is some sort of penalty for selling securities held less than a year, such as higher capital gains rates. It hasn't paid to be a value investor, or long-term investor in this market. Now with a shift of mind-set in Tableau as a short-term trade, I want to examine the last two conference calls closer to see if this could be a good buying point.
In March of 2014, I wrote my first post about Tableau. It was a hot IPO at the time, and I thought the equity was expensive, but was in a good position in regards to its technology. Since that posting, revenue valuations have been cut in half, and the company is now profitable, but it is still an expensive security. Trailing 12 month Price/Sales Ratio is currently 14. However, this hasn't stopped traders from piling on, driving the price higher. This may be attributed to impressive execution.
According to Investor's Business Daily:
"Tableau has beaten analyst estimates on earnings and revenue in each of the nine quarters for which it has filed reports since making its IPO in 2013. Revenue gains have been in the double-digit percentages."
In the investing environment we're in, a good growth stock can levitate for years. This is especially true when your computational efficiency is considered to be leading edge. Tableau's specialty of data visualization has been proclaimed pioneering by both company execs, and The Gartner Group. A ringing endorsement by The Gartner Group can go a long way in enterprise software sales. Company chief Christian Chabot noted in the 2015 Q1 Conference Call:
"Gartner is very influential, very well read. And particularly, in regions where we don't have a lot of brand recognition, it is one of our more important awareness vehicles and sources of lead flow."If we examine some statistics from the past four years, you can see why Wall Street considers Tableau Software a top notch growth stock. Although earnings are minuscule and lumpy on a year-to-year basis, sales and a healthy R&D budget are accelerating. Some of the increase in sales may be from the inclusion in Gartner's Magic Quadrant three years running.
| 2014 | 2013 | 2012 | 2011 | |
| Revenues (in thousands) | $412,616 | $232,440 | $127,733 | $62,360 |
| R&D (in thousands) | $110,923 | $60,769 | $33,065 | $18,387 |
| Net Income (in thousands) | $5,873 | $7,076 | $1,427 | $3,379 |
If we extrapolate revenue statistics out to full year 2015, company guidance is for a range of $617 million to $627 million, up from the $600 million to $610 million from Q1. This represents an annual growth rate of approximately 52% at the high end of the range. It should be noted that Tableau, like the majority of enterprise software corporations, lands a considerable amount of large contracts at the end of the fourth quarter. Some of these sales will come from international markets, which now constitutes 25% of business. In fact, Tableau is opening a new Data Center in Paris to make further inroads in overseas opportunities.
Competition in the "Big Data" visualization niche remains fierce. Rivals such as Microsoft (MSFT), Oracle (ORCL) and IBM (IBM) have much larger coffers than Tableau, but Tableau believes they've built the better mousetrap with first mover advantage.
CEO Chabot proclaims:
"And while everyone else is saying they're kind of figuring it out and doing it, Tableau remains the gold standard, and that will remain our main source of competitive advantage."
To maintain that edge, for the past two years the company spent a great portion of its R&D efforts on Tableau's new iteration, Tableau 9.0. It was released in Q1 with version 9.1 currently distributed in beta. It's the company's biggest leap in its history from version to version on server scalability and resiliency. Its strengths versus the competition continue to be incredible ease of use, a pioneering approach to visual analytics, a self-service platform, and a product that is finely tuned with all the world's disparate data.
Tableau now has 32,000 customer accounts worldwide. The company's "Land and Expand" sales strategy is a grassroots endeavor that has paid off handsomely, in both revenues and word of mouth advertising. Once a client signs up for the service, the Tableau Software sales team helps customers upgrade and incorporate the Tableau solution into other departments within large businesses. In Q2, they signed 233 transactions greater than $100,000 as companies continue to deploy Tableau more broadly within their organizations. Q4 should be a barn burner, but that's almost six months away.
Former NFL coach Bill Parcells is known for saying, "You are what your record says you are.". At this moment, Tableau has been a great long-term investment, especially if you bought it at the IPO price of roughly $30/share. Conversely, it's been a not-so-good investment if you bought at the top, only to see traders go into damage-control after the Q2 conference call. I believe for the time being, the selling has been done.
However, the bull market that started in March 2009 is almost six and a half years old. In addition, we haven't had a 10% correction in the S&P 500 since last October (intra-day, the correction was 9.8%). Therefore, although Tableau appears to have the secret sauce, and the digeratti has put it in the top spot in its niche, based on macro conditions, I'm betting Tableau Software trades lower along with the overall market in the next three months. After all, Tableau is expensive on a price/sales metric. P/E ratios aren't really relevant with young growth companies...at least not in this market, but maybe they should be. Companies with limited earnings may be the first to be liquidated if investors get defensive.
My buy point is between $80-$90 a share. An almost 20% decline. This will be especially true if the FED raises interest rates in September.