This is the first segment of a two-part article about DataWatch. Click here to view Part 2, titled DataWatch is Cheap at $28.
I love investing in a small company undergoing a transition. The reason is simply because investor perception and can be incorrect, and that can create a huge opportunity for value investors.
One company that is ripe for profits is DataWatch (DWCH) . The company is transitioning to become a leader in “big data.” Thanks to this transformation and the company’s small market capitalization of just $185 million, investors haven’t yet recognized the big opportunity with the stock.
So what’s happening at DataWatch? The company has a new management team from IBM at the helm and an acquisition that will revamp its product portfolio.
Revenue growth will be ramping up next quarter. And the valuations of competitors indicate that this stock could double in price.
Two of the most successful recent IPOs were Splunk (SPLK) and Tableau (DATA) . Both are software companies competing in the space of enterprise analytics, providing easy access to big data in real-time. Because of a major paradigm shift towards the use of visual tools for analyzing data, these stocks have received exceptionally high valuations from Wall Street.
Splunk had its IPO in early 2012. It trades at 27 times trailing sales and is valued at $6.5 billion. Meanwhile, Tableau went public in 2013, trades at 23 times trailing sales and is worth $3.9 billion. Neither company is profitable.
Why is the Street giving these companies given such lofty valuations? There are three main reasons:
- High gross margins of more than 85%
- Recurring revenues business model
- Early innings for “Big Data” industry
Demand for the products and solutions from big data companies like Splunk and Tableau is rapidly growing, and has resulted in incredible growth over the past year. Splunk is on pace to grow revenue 41% in 2013, Tableau almost 100%. These are great companies with bright futures, but unfortunately it appears as if Wall Street has already priced the bulk of their success.
Enter DataWatch (DWCH) . This is a little company that went public in 1992 and is valued at just about $250 million. Here’s the catch: since 2011 DataWatch has been undergoing a major transformation to compete directly with offerings from Splunk and Tableau.
This transition has been led by an all-star management team, with a track record of numerous buyouts in the big data analytics space. In 2011, DataWatch hired Michael Morrison as its new CEO. Morrison came with years of executive experience at Applix, Cognos and IBM.
Morrison was first the COO of Applix, which was bought out by Cognos in 2007 for $339 million. Just a couple months after the acquisition, IBM bought out Cognos for $4.9 billion. These were all enterprise software companies specializing in business analytics, exactly where DataWatch now competes. Not a bad track record, especially given DataWatch was worth well under $100 million when Morrison took his position as CEO.
It may seem hard to imagine why five industry leading executives would all leave their current positions to work for a tiny company like DataWatch. I’m impressed by what they’ve accomplished. In just two years DataWatch has transformed from an outdated niche software vendor and become a dynamic real-time analytics player.
A large part of that shift is due to the recent acquisition of Panopticon Software, a Swedish company specializing in the visualization of real-time big data analytics. DataWatch announced the acquisition in June, and it was completed in late August. The all-stock deal was done and on the conference call, Panopticon’s management specifically pointed to DataWatch’s low valuation as the rationale for selling the company in an all-stock deal.
Industry experts were quick to rave about the acquisition. Philip Howard of Bloor Research sums it up nicely in a blog post: “DataWatch … isn’t very sexy … Panopticon, on the other hand, is sexy.”
Panopticon doesn’t just sound like a trendy software company. But its numbers are impressive. Although concrete financial data will be tough to find on the company until DataWatch announces its third-quarter results, we do have a couple of hints to work from. On the original conference call it was noted that Panopticon produced $5 million in revenue in 2012, an increase of 112%.
Although it’s very small, Panopticon grew faster than both Splunk and Tableau in 2012. Ironically, DataWatch got this higher growth, for just a fraction of the cost. When it was announced, the deal was worth $33 million, meaning DataWatch paid just 6.6 times sales. That translates into about 25% of the valuation multiple of these better-known competitors.
But what really makes me excited is the potential of combined product offerings from DataWatch and Panopticon. DataWatch has over 40,000 customers, including 99 of the Fortune 100 companies. Meanwhile, Panopticon has just 75 customers. It’s safe to assume that Panopticon’s customers are signing much bigger contracts, similar in structure to what Tableau and Splunk typically receive.
If DataWatch can successfully integrate its new offerings and sell Panopticon’s software to its 40,000 customers, there is huge potential for growth. Even if DataWatch can only sell 1% of its customers the Panopticon services, the business could grow by a factor of four.
Learn more about DataWatch, and why I think the stock could rise by 50%. To read Part 2 of this article, click here: DataWatch is Cheap at $28.
Disclosure: Galileo Russell and Ian Wyatt personally own shares of DataWatch.
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