It’s been quite a run for business analytics software provider Tableau Software (NYSE:DATA). DATA stock has tripled since early 2017. The momentum behind Tableau stock has been such that it kept gaining toward the end of last year, as other growth stocks generally tumbled.
Even with a 5.5% decline on Monday, there’s an argument that the momentum should continue. Tableau remains a leader in data visualization. That positions it perfectly to take advantage of the “big data” trend, as I argued in recommending DATA stock back in August.
Revenue growth looks like it’s decelerating, with the midpoint of 2019 guidance suggesting just an 18% increase this year. But accounting changes are having an impact. So is Tableau’s shift toward subscription sales. That shift pushes revenue recognition into future years affecting near-term growth.
Still, even with underlying growth of 30%+, DATA stock looks dangerous at the moment. Competition remains intense and will only get tougher. Valuation is stretched after the huge gains. Tableau stock might not be a short, and it’s possible it can continue to surprise the skeptics. But there’s reason to believe that at least in the near-term, DATA may have already peaked.
The Case for Tableau Stock
The argument for Tableau stock is much like that of other growth stocks in the enterprise software space. The company’s data visualization products are something close to revolutionary and hugely valuable tools for enterprises across every industry. With data demands and supply only rising the ability to understand that data becomes more important every year.
Tableau appears to be the clear leader in the space. It’s outcompeted older firms like IBM (NYSE:IBM) and Oracle (NYSE:ORCL), among many others. Tableau Data Prep has moved the company into the data preparation market, while its Hyper engine further expands the addressable market.
It’s a classic SaaS growth story, along the lines of Salesforce.com (NYSE:CRM), Splunk (NASDAQ:SPLK), and Workday (NASDAQ:WDAY). DATA stock isn’t cheap, admittedly: the high end of 2019 EPS guidance suggests a 68x P/E multiple. But revenue growth should be solid, with annualized recurring revenue (ARR) guided up 35% this year amid the shift to subscription sales.
Meanwhile, like other SaaS high-flyers, Tableau is building a base of sticky, long-term customers who will deliver enormous profits down the line. In its Q4 conference call, Tableau announced a long-term target of 25%+ free cash flow margins. It will take years to hit that target, obviously, but in the meantime Tableau will continue gathering more customers, and more revenue, to drive those out-year profits.
The Case Against Tableau Stock
From a long-term standpoint, the big risk is that Tableau faces more competition than other high-flying SaaS stocks. Newly public Domo (NASDAQ:DOMO) is much smaller but is driving better revenue growth, suggesting market share gains. Microsoft (NASDAQ:MSFT) and Oracle, among others, are trying to play catch up. Salesforce.com’s Einstein Analytics is a clear shot against Tableau’s bow.
There’s enough growth to go around, to a point. But at ~7x 2019 revenue guidance (even backing out net cash), DATA stock isn’t priced for any type of slowdown. And it’s important to remember that Tableau has stumbled in the past: Tableau stock lost almost half its value in a single session back in 2016 amid slowing growth. Competition worries were a big factor then, too.
DATA isn’t likely to drop 50% after earnings again. But it’s clear that there’s little room for error. Again, DATA stock has tripled, and touched an all-time high just a few sessions ago. It doesn’t take much to make Tableau stock wobble – if not turn south, even beyond Monday’s decline.
Will the Market Stay Patient?
It’s not hard to wonder if SaaS stocks on the whole are ready for a pullback. The initial reaction to Salesforce earnings on Monday suggests valuations may be topping out.
Salesforce unsurprisingly beat consensus estimates once again. But it wasn’t enough. After falling 3.7% in the regular session, CRM is down another 2.7% after-hours. I wrote last week that the reaction to earnings might signal investors’ appetite for further risk in tech. The initial response, plus Monday’s broad tech weakness, suggests that valuations might be near a top.
That would be a significant problem for DATA stock. 7x revenue isn’t a huge multiple: many peers still are trading at 10x sales. But it’s big enough, and competition intense enough, that it can come down. With earnings still too low to really support the stock, any sign of a stumble could send investors fleeing.
There’s still an attractive story underlying Tableau, a key reason I recommended the stock last year. But at these levels, in this market, risks seem to be rising. And there’s a very good chance that, at least in the short-term, DATA stock could pull back.
As of this writing, Vince Martin has no positions in any securities mentioned.
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