Where Is the Best Value Opportunity in Big Data?

Big data is one of the most hyped industries in the market, with companies Splunk (NASDAQ: SPLK  ) and Tableau Software (NYSE: DATA  ) being market favorites. The reason for this excitement lies in its growth rate -- six times faster than IT -- but that growth comes at a cost, implying that under-the-radar big data companies like Verint Systems (NASDAQ: VRNT  ) might offer more upside opportunity.

What's so exciting?
Big data is a broad space, one that IDC estimates will produce $16.1 billion in 2014. According to IDC, the majority of big data can be broken down into three key segments: infrastructure, services, and software, which represent 45%, 29%, and 24% of the market, respectively.

Splunk is a machine data analytics software vendor, while Tableau is an analytics/data visualization software firm. Both companies have impressive growth and have demonstrated the ability to secure long-term large customers with contracts that exceed $100,000.

In Tableau's last quarter, it added 1,500 new customers, with 119 being sales over $100,000, totaling more than 15,000 customer accounts. The company produced total revenue of $61.1 million, as maintenance and license revenue both increased 90% year-over-year. Last quarter was Tableau's best, and investors are optimistic about its future.

Splunk has 6,400 new customers worldwide, but is gauged more by the number of deals it closes in a quarter, with $100,000 as the benchmark. In Splunk's last quarter, it closed 207 deals with a value of more than $100,000 and it grew total sales by 51% to $78.6 million.

Growth at a cost
Splunk and Tableau are growing at 50% and 60%, respectively, with expectations for 35% and 40% growth, respectively, in 2014. Both companies have remarkable growth, but that performance comes at a cost.

Company

Revenue

Operating Expense

Cost per dollar earned

Splunk

$267.9 million

$319.7 million

$1.19

Tableau

$192.8 million

$200.6 million

$1.04

By examining the revenue and operating expenses from the last four quarters, it's apparent that these two companies, with near identical growth, are spending on two completely different levels. Splunk spends $1.19 for every dollar earned, while Tableau spends just $1.04. However, what's really impressive is that, last quarter, where Tableau grew sales by 90%, it actually spent less on operations than it earned in revenue. Hence, Tableau earned its first quarterly operating profit!

Which is best?
Considering both companies from a valuation stance, neither is expected to be profitable in the foreseeable future. Yet, examining each company's market capitalization divided by annual revenue, a disconnect is apparent in the valuation of these two companies.

Tableau trades at 21.8 times sales, while Splunk trades at 30.2 times. Therefore, Tableau is growing faster, spends less money, and is substantially cheaper. Hence, it's easy to identify which of these two stocks presents the best opportunity.

The lesser of two evils
While Tableau may have more upside value than Splunk, it might just be the lesser of two evils.

Tableau is a $4.2 billion company, but it had just $192.8 million in sales over the last 12 months. This is a massive disconnect between fundamentals and valuation, implying that investors assume Tableau will one day grow large enough to support its valuation.

However, using a fair multiple of two times sales, it could take Tableau 10 years to earn $2 billion, and that's with an annualized growth rate of nearly 30%. Also, this is assuming Tableau's share price doesn't increase at all during this 10 year period. Fundamentals and valuation must eventually align, and Tableau's valuation suggests many years of underperforming fundamental growth.

An unsuspected value opportunity
Investors might find an under-the-radar company, Verint Systems, to be an attractive long-term investment. Verint is a diversified big data company operating in the software segment of the industry. It offers an array of products in enterprise, communications, and video intelligence, with its communications segment growing the fastest.

In the last 12 months, it has produced revenue of $880.5 million, about 4.5 times greater than Tableau. Yet, Verint's market capitalization is nearly 50% less than Tableau's, at $2.4 billion. Thus, it trades at just 2.8 times sales, but doesn't have the same rapid growth appeal as a Tableau or Splunk. However, with more annual revenue, it is reasonable that year-over-year growth would be less explosive.

Still, despite Verint being significantly larger, it is expecting to produce sales of $991 million in 2014, 13% higher than its current trailing 12 month revenue. Lastly, and what makes it so attractive, Verint is highly profitable, with an operating margin of 14.5%.

Final thoughts
Clearly, Verint Systems is the most under-the-radar of these three companies. Its combination of conservative spending, growth, and size (relative to market capitalization) means that long-term consistent gains are possible in this fast-growing segment.

Splunk and Tableau have high expectations, but there are no guarantees that either will ever grow to the size of Verint, with sales approaching $1 billion. Surprisingly, both Splunk and Tableau have higher market capitalization, so both are worth more than Verint. As an investor, this fact is a good indication that Splunk and Tableau present a value trap, and that Verint presents an opportunity. 

While Tableau and Splunk steal the spotlight, neither company is certain to grow to the same level as Verint. Moreover, there is no proof that either will become as effective, or that either could produce the same level of growth. Therefore, Verint might be more attractive as a long-term value investment.

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