TABLEAU SOFTWARE INC DATA S
July 22, 2017 - 12:39pm EST by
jcp21
2017 2018
Price: 63.77 EPS 0 1.0
Shares Out. (in M): 60 P/E 0 64
Market Cap (in $M): 4,970 P/FCF 35 32
Net Debt (in $M): -955 EBIT 0 0
TEV ($): 4,015 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Description

Background:

In 2015, Tableau (ticker: DATA) was a high flying business analytics software company with exceptional growth and an enthusiastic customer base. A weak Q4 2015 sent the stock tumbling from over $100 per share to as low as $40 in a matter of days. In recent months DATA's stock price momentum has improved primarily due to strong overall stock market growth. DATA's fundamentals have failed justify its stock price recovery. Q1 17' growth came at only 16% versus 27% 2016 full year revenue growth.

The Q1 conference call focused mostly on the shift toward subscription versus perpetual offerings yet competitors can and do match this strategy so the innovation's impact on the long-term growth of the company is questionable. And, it says something when a company that spends $300 million per year on SG&A is talking mostly about a fairly basic financial innovation. 

2 Part Thesis: 

Part 1 - Valuation: Tableua maintains a $5 billion market cap with guidance for flat EPS in 2017 (6x ttm P/S). Analysts, on average, expect 6% revenue growth in 2018. Investors are clearly expecting margin expansion to justify the valuation. Based on DATA's position as the high priced competitor I believe significant margin expansion is unlikely.   

Part 2 - Market position: Tableau (DATA) sells an expensive product (~$10 per user versus DATA's ~$35 per user) that is purchased by customers who place a high value on access to "bells and whistles" that ultimately are not essential to generating quality business intelligence (converting data to profits). Cheaper products from both larger companies like Microsoft and and startups like Qlik Sense are gradually building capabilities to offer either comparable or "almost as good" alternatives that save companies millions in SG&A. 

Key reasons Tableau's core product is poorly positioned: 

- "High end" data visualization is overrated. Based on my experience, the majority of users don't have the time to fully utilize a tool like Tableau. In many companies, getting access to a customized, automated set of dashboards is all most people need (not something Tableau can offer at a competitive price in my opinion, it is a utility service).

Even many power users often don't have the time to do the deep dive research that platforms like Tableau require. Many anaylsts are overloaded with ad hoc data requests (getting sales for the west region for product x excluding companies xyz), regular report maintaintance (working wth database analysts on why the dashboards are showing up wrong), building new routine reports, and assisting business leaders with routine decisions.

In my experience, "deep dive" research projects are fun but rare. Even when these projects occur, what really matters is the analyst's ability to know what data synthesize and how to communicate findings in an actionable, persuasive way. As a result, quality analysis can be consistently generated with both cheap or expensive tools.  

Example to illustrate this point: if I could bet on the work of two analysts (one has Tableau the other has Excel, assume no large data sets are required for now) The good analyst with excel is going to beat the average analyst with Tableau most of the time. Furthermore, cultural issues in companies are generally but bigger drivers of decision making quality. Quality analysts regardless of tools typically build the trust of decision makes. The trust results in better and faster decisions. All this to say is that Tableau is a great product but I believe it the extra just is rarely justified (see the "risks" section for why many companies buy Tableau) 

Building on this point, great business analytics is in my opinion 90% thinking and reasoning and 10% tool based. Consider this example: a company needs to know what percent of their customers are Chinese but they haven't been capturing that field in the data base. Ask Tableau to help with this and you get nothing. Ask excel with a good analyst and you can get the answer. Sample 1,000 random customer names and count how many are typtically Chinese. That method gives you a directionally correct answer which is usually good enough. 

Price pressure: the below dynamics exp lain why prices for business analytics platforms continue to drop. 

- Overall competition continues to build (Here are 10 alternatives to Tableau - http://technologyadvice.com/blog/information-technology/tableau-alternatives/).

1) Existing competitors like Oracle and SAP invest heavily in their products; 

2) Salesforce.com recently has been building their capabilities through internal development and M&A.

3) Many newer companies have products comparable to Tableau’s but at a much lower price (Tableau spent $300m on R&D in 2016, many multiples of what many of these newer competitors spend...).

Example to demonstrate the level of innovation occuring: one new competitor (very cheap) comes from Thoughtspot (founded by Google developers). Thoughtspot is a search engine based analytics tool that allows you to seach: "product x sales, orange county, last 12 months." For business people on the go (sales reps, executives, etc.) Thoughtspot is more useful than Tableau's "deeper dive" features. A company might own both tools but it shows that Tableau's hold on the business analystics market is going to be challenged from many directions. And, the multi-tool environment lends itself to saving money on each tool versus making one big purchase on a product like Tableau. 

Conclusion

Despite massive growth (57,000 customers), Tableau is still only expecting breakeven EPS for FY 2017. With revenue growth decelerating and the industry maturing some (growth now expected only in the mid single singles by 2019 according to IDC) one might wonder how scalable the business truly is.

Furthermore, the industry is clearly facing pricing pressure with Microsoft almost giving away its Power BI product and newer competitors with much lower R&D and sales/marketing costs offering much lower prices (~$10 per user versus DATA's ~$35 per user). It seems clear that DATA doesn't deserve an aggressive valuation based on its decelerating growth and weak profitability. Furthermore, Tableau's weak competitive position could indicate that the company is headed toward a long-term stagnation or decline (2019 and beyond....). 

Risks

1) Buyout (top risk): DATA's $5 billion market cap make it an affordable target for larger companies like Microsoft. 

2) I could be underestimating Tableau's ability to acquire and retain. Software purchase decisions are never made outside of a company's political context. Example: a CIO really likes Tableau after seeing a flashy presentation from the company and asks a few of the company's top analysts to give their recommendation. The analysts have a great time exploring the bells and wistles. Knowing that this tool can only help their ability to generate attention getting insite the analysts offer a glowing 'buy' recommendation.  

Even though: 1) Much cheaper alternatives are available and 2) Most people getting Tableau seats will rarely come close to fully utilizing the product, the CIO buys Tableau. 2 years later, the company can cancel and switch to a cheaper competitor. By then, 2% of the user base is "love" Tableau and are ready to go to war to defend their seats. The CFO and others who like the prospects of switching to save millions in SG&A examine other products. But, the 2% that heavily use Tableau threaten to quit the company if they lose access to the tool. Wanting to avoid a political battle over $1.5 million, the CFO keeps Tableau. 

In my opinion, Tableau is going to face extra pressure in the next economic downturn (recesssion odds go up every year given how late we are in the cycle). When companies are looking for ways to cut SG&A, I find it hard to imagine that many companies won't prefer cheaper but still "almost as good" alternatives for data analytics.   

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

1) Continued weak sales growth; 2) Success of competitors; 3) Ongoing profitability issues

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