Finally, after ten long years of clawing every inch of the way back, Informatica (INFA) is getting close to its all time high of $58/share during the dot.com bubble. It didn't stay at $58 very long because in one fell swoop, it collapsed to $3 just a few months later in early 2001. Last Summer you could have scooped it up for $22, but those days are over and the price has since mushroomed to close to $50.
I've been intrigued, not by the stock, but by it's sector of data mining ever since I became aware of it a couple of years ago. Data mining stocks haven't really piqued my interest that much because the main players are software industry behemoths IBM (IBM), Oracle (ORCL), Microsoft (MSFT) and SAP (SAP). The slower growing, larger companies aren't as compelling to me as their more nimble, smaller, faster growing brethren. Informatica fits that bill and recently caught my eye because it sits in the middle of the pack on the Investor's Business Daily top fifty stock picks.
As I've mentioned in earlier posts, equities that reside in the IBD 50 raise a red flag because they have a great amount of momentum behind them, and, are candidates for pull-backs. Some more severe than others. Think F5 Networks (FFIV) of late, or, going back a few years, Veriphone (PAY). I want to give Informatica more scrutiny because I think it may be in the right place for continued growth given the industry it's in, but, want to look at the other side of the equation, too.
Data mining companies basically facilitate the management of enterprise data warehousing and data integration software. Their products access and transform data from a large variety of legacy and cloud systems and deliver it to other data warehouses, transactional systems and analytic applications. According to Investor's Business Daily, they help: "...companies, governments and research institutions store, manage and understand the data they collect.".
To be more specific, I am going to paraphrase the Informatica 2010 10K and state: that during the past 20 years, companies have made large investments in process automation. The results are silos of data created by a variety of software applications such as: enterprise resource planning (ERP), customer relationship management (CRM), supply chain management (SCM) and in-house departmental operational systems. These applications have increased data fragmentation and complexity because they generate massive volumes of data in disparate software systems that were not designed to share data and interoperate with one another.
In addition to the more conventional enterprise applications, the recent onslaught of social networking and mobile computing in the workplace has increased corporate data even more. As Informatica CEO Sohaib Abbasi explains in the most recent conference call: "Relational database applications manage transactions. Social networking manages interactions. And the promise for social computing is for the enterprise to gain a competitive advantage by being proactive with current social data rather than being reactive with past relational data....The combined usage of by enterprises of social networking services such as Twitter, Facebook and blogging is doubling every year, resulting in the recent unprecedented explosion of data.".
How explosive? According to the incredibly persuasive Abbasi, Informatica's addressable market was $11 billion in 2005 and is expected to grow to $40 billion by 2013. I also saw some conflicting statistics by market researcher IDC that claims an 8.5% compounded annual growth rate for revenues in the market from 2009 to 2014. Not exactly an apples to apples comparison, but you get the drift.
No matter what industry data you wish to follow, the average analyst expectation for CAGR in the next 5 years for Informatica is 18.5% according to Yahoo Finance. With a current price of $47 and a P/E Ratio of 42, you get a PEG Ratio (price/earnings/growth) to the tune of 2.3. Not exactly nosebleed altitudes, but calls into question just how long the company can continue its impressive run, at least at the pace it has experienced the last six months.
In addition to valuation concerns, there is also the problem of competition. In a recent Standard & Poor's report evaluating Informatica, they specifically address the other players in the field, with the top 5 largest vendors captivating a 59.6% share of the market. Informatica ranks 7th, but only commands a 1.4% slice. It can be argued that this only gives them more room to grow, but it may also signal slim pickings going forward as companies like IBM, Microsoft, Oracle and SAP gain better traction with their more robust platforms. Informatica continues taking steps to broaden its offerings, but eventually, it may hit a ceiling.
If you are a momentum player, this may be a good place to park your money as Informatica has had the Midas Touch of late. I'm a believer that things return to the mean and if you apply this to their lofty P/E ratio of 42, you can probably bag this stock at a more reasonable valuation. Going back 5 years, Informatica's P/E ratio has typically been a more modest 26. Bear in mind that Informatica had a great 2010, so comparisons going forward will be more difficult. That, coupled with the fact that the market is currently under pressure, make me inclined to sit back and wait.