Tableau Software, Inc. (DATA-NYSE): Fast growing, undervalued stock

Recommendation

I recommend taking a long position in Tableau Software Inc. (DATA-NYSE), a developer of software products for business intelligence applications, which currently trades at $92.26 per share, because it is significantly undervalued.

The Company continues to experience rapid growth both domestically and internationally. The revenues continue to increase both on a YoY and a QoQ basis and the Company has been able to both maintain and increase its customer base.  Company has been making conscious efforts towards its R&D and continues to innovate. It recently released the latest version of its software, Tableau 9.0, which offers advances in the areas of visual analytics, performance, scalability, data preparation, and enterprise capabilities.

Key investment risks include the inability to sustain high growth rate and increased competition from other software companies.

Company Background

The company makes software products for business intelligence applications. It currently makes four key products: Tableau Desktop, a self-service, powerful analytics product for anyone with data; Tableau Server, a business intelligence platform for organizations; Tableau Online, a cloud-based hosted version of Tableau Server; and Tableau Public, a free cloud-based platform for analyzing and sharing public data.

The company has released nine major versions of its software, each expanding and improving its products' capabilities and recently released Tableau 9.0, which offers advances in the areas of visual analytics, performance, scalability, data preparation, and enterprise capabilities. In addition, Tableau Server and Tableau Online have been re-designed to deliver a faster, more scalable, and extensible platform for customers.

Company’s products are used by people of diverse skill levels across all kinds of organizations, including Fortune 500 corporations, small and medium-sized businesses, government agencies, universities, research institutions, and non-profits. As of June 30, 2015, Company had over 32,000 customer accounts located in over 150 different countries.

Company’s distribution strategy is based on a "land and expand" business model and is designed to capitalize on the ease of use, low up-front cost and collaborative capabilities of software. To facilitate rapid adoption of it’s products, Company provides fully-functional free trial versions of its products on its website and has created a simple pricing model. After an initial trial or purchase, which is often made to target a specific business need at a grassroots level within an organization, the use of its products often spreads across departments, divisions, and geographies, via word-of-mouth, discovery of new use cases, and its sales efforts.

Investment Thesis

I believe the stock is underpriced due to the following reasons:

1. The existing market for analytics software is underserved and the Company has a large market allowing it to substantially expand its customer base. The rapid growth experienced by Tableau as well as an increase in its overall revenue and international revenue is a testimony to this fact. The company reported an increase of 65.2% YoY for Q2, 2015 and its international revenue increased by 83% for the same period. The international revenue now accounts for 24.5% of the Company’s total revenue and international market offers many possibilities to continue the strong growth demonstrated by the company in US.
2. The Company currently has 32,000 customers located in over 150 countries, which is an increase of 52.3% YoY and an increase of 8.8% QoQ. The Company is aggressively expanding its direct sales force and indirect sales channels outside the United States and currently has products that support eight languages. It signed its first seven-figure deal in Asia-Pacific and recently opened an office in Shanghai, China and Paris, France, which represents Company’s third largest market behind Great Britain and Germany.
3. Company continues to invest in its R&D efforts and its ability to continue to innovate, improve functionality, and adapt to new technologies. It recently released the latest version of its software, Tableau 9.0, which offers advances in the areas of visual analytics, performance, scalability, data preparation, and enterprise capabilities. Actions like these as well as rapid release cycles for various software allows the Company to maintain its competitive position.

Underserved market, increasing customer base, re-investment in R&D and strong ability to innovate, offer significant upside in taking a long position in this stock.

Valuation

I performed a DCF calculation for FY 2015 E to FY 2019 E using a multiples method.  I made the following operating assumptions in doing my DCF analysis:

*Please note that the projections were based on prior period actuals, information from company financials and data obtained from Bloomberg and Capital IQ.

On the basis of these operating assumptions I made the following Cash Flow Projections:

For the DCF analysis I performed a sensitivity analysis wherein I choose a Discount Rate (WACC) ranging from 10% to 16.5% and Terminal EBITDA multiples for a range of 30.0x to 150.0 x. These numbers were selected by me on the basis of comparable companies as well as Tableau’s performance in prior periods.

Based on the above analysis I got a range of values. Based on the strong historical performance of the company thus far, and its ability to innovate along with strong customer acquisitions, improved expansion rates and increasing deal sizes, a much more conservative EBITDA multiple should be 75.0x, which increases the valuation of the company from its current stock price of $92.26. Additionally, a WACC rate of 12.5% is more realistic and therefore, I believe a stock price of $137.16 is more realistic and the company is undervalued. Even, if the company were sold at a very small EBITDA multiple of 35.0 x (which is highly unrealistic at this point), the company’s stock should still be trading at $103.65 using a WACC of 12.5%. Therefore, I believe that at the very minimum the share is undervalued by 12%, although a more realistic estimate would put the share price to be undervalued by 49% (share price of $137.16).

Risk factors and how to mitigate them

1.      The company continues to aggressively grow its business. It is hiring new employees at a rapid pace, particularly in its sales and engineering groups. Inability to train these new employees, including its direct sales force, could negatively impact the company’s sales as customers may loose confidence in the knowledge and capability of its employees.

2.     Company’s sales are subject to rapidly changing technology and evolving standards. There is competition not only from large software companies including suppliers of traditional business intelligence products but also business analytics software companies like Qlik, MicroStrategy, TIBCO Spotfire Inc. Therefore, the company operates in a highly competitive environment and needs to continue innovating and investing in its R&D. Inability to do so would negatively impact Company’s top and bottomline.

We can mitigate these risks via put options.