Tableau Software: When You're Hot, You're Hot

"Big Data" visualization pure-play Tableau Software's (DATA) "land and expand" business model has paid of in spades. It's a grassroots level strategy that often nets individual customers via free trials, then spreads across an organization's departments, divisions and geographies via word-of-mouth. According to the most recent conference call, the overall average initial order size has consistently been under $10,000. That same document reported Tableau closing 179 transactions greater than $100,000 for the quarter.

It was a blowout quarter in a blowout year for the Seattle based company. Wall Street has taken notice, and propelled the shares to over $90 after coming public at $31 just nine months prior. Shares reached $100 in recent a market upswing, but have sold off 10% in the past few weeks. However, it still remains one of Wall Street's glamour stocks.

With 2014 revenues guidance at $320-$325 million, and a lofty market cap just north of five billion dollars, my contention is that the equity is way over its skis for long term investors. Ninety dollars a share is just not sustainable. Nevertheless, the market can stay irrational longer than you can stay solvent, or so the old chestnut goes, so short sellers beware. I believe there are some catalysts for short term traders that may push shares even higher because the data analytic sub-sector is in vogue at this juncture.

Catalyst #1: Gartner Positions Tableau as a Leader in Business Intelligence

For the second year running, Gartner selected Tableau as a leader in its Magic Quadrant for business intelligence and data analytic platforms.

(Chart Source: Gartner)

If you examine the chart closely, you can see Tableau outpacing competitors such as Microsoft (MSFT), Qlik Technologies (QLIK), Tibco Software (TIBX), Oracle (ORCL), and IBM (IBM). According to Gartner, "It is very likely that 2014 will be a critical year in which the task of making 'hard types of analysis easy' for an expanded set of users will continue to dominate Business Intelligence market requirements.". Tableau's easy-to-use, plug and play software makes it a hit for end-users as the company invents and commercializes cutting edge advances in analytics. You can see one reason why Wall Street put shares prices at a premium. Traders and investors both like technology leaders, and Tableau certainly fits the bill.

Catalyst #2: The Partnership with Splunk

Earlier this month, Tableau and Splunk (SPLK) announced a strategic technology alliance. Although both companies reside in the data intelligence sub-sector, they're more or less complimentary technologies. Splunk leads the market in enabling organizations to collect, index and make searchable unstructured data. Tableau Software's products allow you to visualize that data in the form of charts and graphs.

To give an example, it's almost like the 2002 movie Minority Report, where police officers can predict murders before they happen. Big banks of computers crunch numbers that will predict the probability of a murder - where and when it's going to happen. That's the analytic side of the equation, where Splunk fits in. The holograms the police use to massage and interpret the data is a function of what Tableau does. Like a souped up Excel spreadsheet.

Tableau's mission is to help people see and understand data. Coupled with Splunk's large pool of the flotsam and jetsam of the machine age, additional sales should be generated for both companies. More than 7,000 enterprises in 90 countries use Splunk software to deepen business and customer understanding. Combine that with the 17,000 client base of Tableau, and you've got a potent mixture. However, both equities have come a long way in a short period of time. Like Tableau, Splunk has more than doubled in value this past year.

Catalyst #3: The Blowout Quarter

The numbers were outstanding:

• Tableau posted a record fourth quarter delivering total revenue of $81.5 million. Wall Street consensus had been modeling for $67.1 million. This represented a 95% increase over the prior year Q4.
• For the full year, it posted total revenues of $232.5 million, growth of 82% over 2012.
• The company achieved a compound annual growth rate of 89% over the past three years.
• International sales were 22% of total revenues. CEO Christian Chabot believes that the international business operations are what the domestic side of the business was like three or four years ago. There is plenty of room for overseas expansion.

As CFO Tom Walker stated during the conference call: "In any given year, we generate the majority of our sales from customers previously acquired.". The land and expand strategy again. Google (GOOG), PepsiCo (PEP), Capital One (COF), Delta Airlines (DAL), Deutsche Telekom, Ford (F), and Bristol-Myers Squibb (BMY) are just some of the companies under the Tableau umbrella. Compound this with the partnership with Splunk, and you've got a real growth story on your hands.

Going Forward

According to management, two things in regards to prospective enterprise clients happened last year that helped contribute to the dramatic increase in sales. One was the success of the IPO which introduced Tableau to a larger base of customers. The second is the release of Tableau 8.1 in November. This provided users with more advanced analytic capabilities by integrating with the open source statistics program R. Tableau is scheduled to release version 8.2 in the second quarter, and Tableau version 9 in the first half of 2015. These releases could also be catalysts for increased sales.

Here's where it gets dicey. Although quarter-to-quarter can be lumpy (Q1 is notoriously know for being light), the company has projected annual revenue growth of approximately 40% at the high end for 2014. That's a far cry from the 82% in 2013. Granted, the company can't grow at almost 90% forever, and this 40% projection could be a low ball figure, but that's a significant drop. As far as earnings go, there are none for 2014. The company is expecting non-GAAP operating losses of between $15 and $20 million for next year. This is because the company is investing heavily in R&D, and increasing headcount. In addition, management expects gross margins to decrease because of the additional expenditures.

Conclusion

This is a pricey stock. Yahoo Finance valuation statistics show:

• Price/Sales (trailing twelve months) of 23.34.
• Price/Book (most recent quarter) of 22.18.
• Total Cash Per Share (most recent quarter) is $4.15.
• Enterprise Value/Revenue (trailing twelve months) is 22.70.
• Short % of Float (as of March 11th, 2014) is 3.7%, as reported by The Wall Street Journal.

It should be noted that the short float decreased by almost 10% right after the earnings release because a short squeeze ensued. This stock is in play, but you're paying top dollar for it.

If you like to trade based on momentum, this could be a stock for you. It sits in the intersection of two red hot sectors, big data analytic pure plays and recent IPO's. That said, if you're like me and prefer growth at a reasonable price, better buying opportunities may be on the horizon. For instance, the company will be issuing additional shares of stock, which may put pressure on the inflated price. Macro headwinds are always in the picture, too.

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Sections of this article were aided by Tableau Software's recently released 10-K (.pdf file). It is the second in a series of "big data" mining and analytic pure plays posts. The first one featuring Splunk can be found here.

Splunk: Expensive By Most Metrics

Mining and analyzing unstructured machine data is a business practice that's here to stay. Last year was a huge year for many small cap "Big Data" stocks. Splunk (SPLK), Tableau Software (DATA), and Datawatch (DWCH) doubled, and even tripled in value. Much larger competitors in the business intelligence arena didn't fare so well. EMC (EMC), IBM (IBM), Oracle (ORCL), and SAP (SAP) had lackluster performances in a year that the S&P 500 was up nearly 30%. That said, the smaller data analytic securities appear to be overvalued, most notably Splunk.

The Company

Splunk is the undisputed leader in operational intelligence of the data analytic pure plays. Its software detects gridlock in a corporation's networks, and can massage data in innovative ways to improve organizational performance. CEO Godfrey Sullivan talks about two examples in the most recent conference call:

One of our large customers is analyzing the position and performance of fuel tankers on some of the world's most dangerous roads, proactively monitoring for speeding, illegal fuel transfers, breakdowns and hijackings. Additionally, a large U.S. government contractor is using us to analyze its sensor data from industrial facilities to prevent dangerous accidents in handling hazardous materials.

To paraphrase the most recent 10-K, the core of Splunk's software is a proprietary machine data engine that enables dynamic schema creation on the fly. End users can run queries without having to understand the structure of the data. Splunk compliments the core product with additional content in the form of apps or add-ons that can be deployed on top of the main data engine. It doesn't require customization, long deployment cycles or extensive professional services commonly associated with traditional enterprise software applications. It works like a browser, much like Google's (GOOG) Chrome.

Last quarter, Splunk added 500 new customers, upping the total to 7,000 worldwide. This includes roughly 60 of the Fortune 100. Although this is a significant penetration of the upper echelon in business, the statistic is somewhat misleading. Those 60 companies don't encompass the entire organization, but may represent just a department or two for each specific entity. Nevertheless, Splunk is making inroads with its disruptive technology.

If this is just the dawn of the machine data revolution, there is plenty of room for growth. For instance, the company's year-over-year quarterly revenue has grown by over 50% in each of the past four quarters, as reported by Investor's Business Daily. Although this growth may not be sustainable, it may still continue at an above average rate, at least compared to the competition like an IBM.

In reading the prepared remarks in the conference call, you come away impressed by the new and upcoming revenue streams created by Splunk partnerships. These relationships include:

• A recently launched joint go-to-market initiative with Cisco (CSCO), focused on simplifying and accelerating threat visibility with the Cisco Identity Services Engine.
• Conducting an upcoming 20 city road show with Palo Alto Networks (PANW), one of Splunk's top security channel partners.
• Because of Hunk, which is the Splunk analytic for Hadoop, the company has established partnerships with privately held Hortonworks, Cloudera, and MapR.
• A partnership with Amazon (AMZN), where Hunk will be offered on the Amazon Web Services marketplace.
• Post earnings release, there was also a partnership announced with Tableau Software. The combination of the Splunk and Tableau services have limited overlap because the technologies compliment each other.

In order to stay ahead of the technology curve, Splunk spends a considerable amount of money on R&D, $41.9 million in fiscal 2013, almost double the $23.6 million spent in 2012. Although fiscal 2014 R&D expenditures won't be released until early April, Splunk has a history of pouring money back into the company for future business development. In addition, what it can't create in-house, it goes out and gets. BugSense was bought in Q3 to enable direct access to data from mobile devices into Splunk. In Q4, the company purchased Cloudmeter so clients can capture data directly from their networks.

Valuation

Splunk had a tremendous Q4 reporting revenue of $99.9 million. Full year fiscal 2014 sales were $302 million, up 52% year-over-year. Although earnings per share for the quarter equaled $0.03, its full year non-GAAP net loss was $3.1 million, or $0.03 loss per share based on a share count of 105 million. The company will probably continue to incur losses, or, break even as it plows more money into R&D, acquisitions, and expanding headcount. For example, employees grew by 300 for the full year, making the total 1,000 under the Splunk umbrella.

For fiscal 2015 (the current calendar year), the company provided guidance of $400 million in revenue. In Q1, sales projections are for $78-$80 million, with an operating margin of minus 8%-10%. I believe that it can be safely stated that a young public company like Splunk should not be valued on an EPS basis because it's investing considerable amounts for growth. It probably won't be profitable for awhile, and if it does get into the black, net profits will be negligible. However, Price/Sales can be utilized as a barometer as to how expensive the equity is.

Utilizing Yahoo Finance statistics, we can observe that the Price/Sales for the trailing twelve months is 32. That's extremely expensive for a company that is guiding revenue growth of roughly 33% for the full fiscal year. Price/Book for the most recent quarter is 12.6. Another generous metric. The market cap is a whopping 9.8 billion. The short float as of February 14th is 3.1%, which may have trended lower since the stock has pulled back significantly the last week. Its intraday high was $106 on February 28th, but has sold off this past week to $88. Quite a drop if you were riding the momentum.

Conclusion

My personal preference in investing is growth at a reasonable price. At this juncture, Splunk doesn't fit the bill, although you may make money with the stock going forward. Consensus opinion calls for a $105 price for Splunk during the next twelve months. Many analysts believe it's a "market perform", which means it will trade in conjunction with the overall indexes. The high price estimate is for $122, the low comes in at $78. Depending on who you follow, you can probably still make a profit with Splunk, but the easy money has been made. It rallied from $28 to it's current price of $88 in 15 months.

It is of my opinion that the overall indexes are backing and filling right now, and could continue to move sideways for the next quarter. In addition, some market pockets such as biotechnology, 2013 IPO's, and the data mining pure plays have made huge runs, and could be ripe for a sector rotation. Geopolitical issues are always a headwind, especially with the Russian invasion of Crimea we are currently experiencing. Combine those opinions with the fact Splunk's revenue growth may be slowing based on the overall expansion of the company, you've got yourself a perfect storm for obtaining shares at a reduced rate.

Immersion: Significant Market Share In Haptic Technology

The majority of information in this article was obtained from the most recent Immersion (IMMR) conference call and 10-K, which was released on February 27th.

Haptic technology is built into smartphones, gaming systems, and cars to create vibrations so a user feels sensations when interacting with the computer screen. A Research and Markets Corporation report projects the global haptic touchscreen market is expected to grow at a CAGR of 41% from 2013 to 2018. The report also states that Immersion is the major haptic solution provider, and covers about 95% of the overall market. Smaller rivals based on market share are Finland's Senseg and SMK Electronics.

I originally covered the organization in December of 2012. My thesis in the article was that the company showed much promise based on the burgeoning haptic market, but that it was a risky stock because of its small market capitalization and history of poor price performance. After signing a multiyear licensing agreement with Samsung (SSNLF) in March of 2013, the stock took off, rising from $6 to $18. Now that the stock has dropped into the $11 range, I've taken a position in Immersion, although it's still a risky bet. 2013 revenues were a very small $47.5 million, 97.2% of which was derived from royalty and licensing.

That multiyear deal with Samsung was a coup for Immersion. Samsung accounted for approximately 47% of Immersion's total revenues for the year ended December 31, 2013, up from roughly 24% of total sales for 2012. Although you always want to have Apple (AAPL) as a customer, Google's (GOOG) Android operating system (where Samsung is a significant player), will account for 78.9% of smartphone market share in 2014. Apple comes up short with a projected 14.9% piece of the pie. However, a fat contract with Apple would certainly be a feather in the company's cap.

Even if a lucrative Apple contract can't be obtained, globally positioned mobile OEM's are solidly in the picture. According to CEO Vic Viegas in the conference call:

In 2013, Immersion achieved key milestones that have established the foundation for future growth in the immediate and long-term. These milestones include extending existing licenses, and securing additional new licenses with key mobile OEMs, including Samsung in Korea, Sharp in Japan, and Xiaomi in China.

Although Immersion has experienced lumpy quarters in regards to revenues, on a year-over year basis, they're in growth mode. 2014 and 2015 should be particularly good years for the company, especially in the smartphone market. Sixty-six percent of Immersion's 2013 sales were derived from smartphones. Further breakdown of revenues are: gaming 26%, medical 7%, and 6% from automobile.

Sony (SNE) utilizes Immersion TouchSense technology in the PlayStation 4 in the gaming sector. In the automobile arena, CEO Viegas elaborates: "Cadillac (GM), Aston Martin, Opel and Acura bring the very first haptically enhanced automotive touch surfaces to market, signaling a bright future in which haptics plays an essential role in bringing safety and usability to the next generation of automotive user interfaces.". Although these two areas of expertise are a smaller part of the revenue stream than smartphones, you can see where the adoption is in the incubation stage. Especially with automotive. Nevertheless, it demonstrates how things are moving forward.

Most, if not all technology firms have patent infringement problems. With 1,500 haptic patents to its name, litigations ensue for Immersion. In 2013, litigation expenses were $5 million. That's a tidy sum for a small company. Management states that figure will decrease by a couple million dollars in 2014. The most notable case is with HTC (HTCKF), an OEM with 6.7% smartphone market share in the United States as reported by comScore. This trial is slated to begin in March of 2015. A favorable outcome in the trial for Immersion could goose equity value next year, above and beyond the projected growth for the company.

Significant Statistics

For a small company with a market capitalization of $342 million, Immersion seems set for the future. It has no debt and a cash reserve of $71 million. That's impressive for an organization that had revenues of about $48 million for 2013. Looking forward, the company expects revenue to be in a range of $54 million to $62 million for the current year. That reflects a growth of 14% to 31% over 2013 based primarily in gains in the gaming and mobile sectors.

At roughly $12/share, the equity trades very close to the 50 day and 200 day moving averages of $11.63 and $12.32 respectively. As of January 31st, it had a short float of just 1.9% with 72% of the shares held by institutions. Consensus twelve month price projection is $16.33, so you can make money on this stock, if you can stomach the volatility.

Some Accounting Notes

If you look at the quote page for Immersion on Yahoo Finance, you'll notice the trailing twelve month P/E ratio is 8.7 and EPS is $1.37. Those are misleading statistics. This is because net income for Q4 2013 included an income tax benefit of $36.8 million, or $1.24 per diluted common share, resulting primarily from the release of a tax valuation allowance relating to net deferred tax assets. Coupled with that, those results reflect the impact of a change in accounting methods for Immersion beginning in that same quarter.

According to the annual report:

Under the new method of accounting, external patent-related costs are expensed as incurred, and classified as general and administrative expenses in our consolidated statement of operations consistent with the classification of internal legal costs associated with internally developed patents and trademarks. Costs associated with acquired patents and other intangible assets continue to be capitalized as incurred.

Addendum

In closing, it should be noted that Seeking Alpha contributor Paolo Gorgo was at the conference call representing his company Nortia Research. Mr. Gorgo has written a series of articles on Immersion which you may find valuable if you wish to drill deeper.