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Risk-Reward With Tableau Software

- By Jonathan Poland

It's obvious society is continually pushing toward two ends - visual and convenient. Imagine the next Warren Buffett (Trades, Portfolio) piling through data sets via a fancy dashboard and that's what the future probably looks like. It's just as plausible that artificial intelligence could render the visualization of big data by humans unnecessary. Why would we need to look at it all that often if robots are running the production lines. Either way, Tableau Software Inc. (DATA) will likely be in the mix, providing the visualization software to make sense of big data and deliver it in a more convenient way.

As the company becomes profitable, there is a big risk, big reward scenario for investors. Tableau has zero competitive advantages, and many very well capitalized legacy software companies with built-in customer bases are already mimicking its feature set, which has set a hard cap on the company's growth potential. Smaller competitors like Domo Inc. (DOMO) are also lurking closely behind.

The company is transitioning into a purely subscription-based business. Revenue growth has substantially decelerated as it negatively impacts top-line sales, but is finally turning a profit. At the beginning of February, Tableau reported strong fourth-quarter numbers. Revenue was up 10.6% to $275.7 million and GAAP earnings were 3 cents per share. More importantly, it has a lot of dry powder with over $1 billion in cash on zero debt as it looks to earn over $1.50 this year and over $2 per share next year.


In fact, Tableau envisions a future where data is ubiquitous and every employee will use its software in the same natural way as they have been using Microsoft (MSFT) Excel. This is wishful thinking, however. There will not be a ubiquitous tech company with the same level of control over data that Microsoft had with business software in the 1980s and '90s. It's too easy to build new products and there are too many customers that need solutions.

The Fortune 1000 company employs 35 million people. Tableau's products are priced from $12 to $70 per month based on whether the user is just viewing or creating and managing data solutions. Given Tableau's gross margin rate of 88%, it shouldn't be hard for it to drive profit for years to come.

That said, considering how technology companies, especially profitable ones, are priced in the market right now, betting against Tableau would be a bad idea even if it traded at 10 times sales and 58 times forward earnings. The company's enterprise value is $10.2 billion, which seems quite undervalued if the company's growth rate continues on its current trajectory.

Will the next market correction and economic recession bring down the need for technology? No. Will it stop the free flow of money expansion into the system from the Federal Reserve? Doubtful. In that case, inflation will play its part and stock values will continue to rise faster than they should. As Tableau rises from $1.1 billion in sales to $5 billion or more by 2030, the market value will likely be at least five times greater.

Disclosure: I am not long or short any stocks mentioned in this article.

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This article first appeared on GuruFocus.