Is CommVault Systems, Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does CommVault (CVLT 0.77%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell CommVault's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at CommVault's key statistics:

CVLT Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

CVLT Return on Equity (TTM) data by YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
CommVault missed out on a passing grade today only because its net income has grown faster than its free cash flow. Still, six out of seven passing grades is quite strong. It's also worth keeping in mind that CommVault's free cash flow has consistently been higher than its net income, and its latest trailing 12-month free cash flow is nearly double its trailing 12-month net income. Despite the company's obvious prowess, the market has punished CommVault's shares during the past year, which has left many investors wondering when perception will again catch up to reality. What can CommVault do to turn things around? Let's dig deeper to find out.

It's been a rough road for CommVault in 2014. The company's fourth-quarter report led to a stock bloodbath, as shares dropped nearly a third lower on what was generally nothing more than mixed results. The key takeaway in that report wasn't so much that the company didn't come in where Wall Street wanted, but that CommVault's top- and bottom-line growth rates had slowed to the weakest pace recorded in three years. Analysts at RBC Capital Markets, Raymond James, Mizuho Securities, and Sterne Agee have all moderated their expectations since the fourth-quarter report. RBC and Mizuho each dropped their price targets to $61 and $60 per share, respectively, and analysts at Raymond James and Sterne Agee voiced concerns about the company's growth prospects.

CommVault's EPS growth rates have always been a bit erratic, but the weakening trend has now become unmistakable -- CommVault simply isn't growing its EPS the way it used to. Since CommVault also recorded the slowest rate of year-over-year quarterly revenue growth since the end of the recession, it certainly seems like the good times are nearing an end:

CVLT Revenue (Quarterly YoY Growth) data by YCharts.

Of course, "good times" can mean quite different things when considering different companies. CommVault's three primary  competitors, EMC (EMC), IBM (IBM 0.06%), and Symantec (GEN 0.59%), have not matched CommVault's top-line growth rate for a single quarter out of the past three years and, at the moment, neither IBM nor Symantec are even reporting any sort of revenue growth at all:

CVLT Revenue (Quarterly YoY Growth) data by YCharts.

CommVault doesn't hold up quite as well when compared to its competitors' EPS growth rates. While it's consistently posted the highest quarterly EPS growth of the four companies, it's recently fallen behind Symantec -- but at least it's still outperforming EMC and IBM, which have struggled mightily (and frequently failed) to push quarterly EPS higher year over year:

CVLT Normalized Diluted EPS (Quarterly YoY Growth) data by YCharts.

What's notable about these two graphs, particularly the revenue comparison, is that CommVault is far from alone in fighting slower growth. All four data-management leaders show an unmistakable pattern of slowing growth, and it can't be a coincidence that the valuable services these companies provide have fallen somewhat out of favor as cloud-computing solutions proliferate. Companies at all levels have access to an increasingly diverse array of low- or no-cost data-storage solutions and, although CommVault's core offerings make full use of cloud resources, it must also promise a competitive edge over those cheaper alternatives.

As long as its growth rates remain positive, CommVault can at least show financial proof of its competitive edge; but slowing growth also serves as a warning sign that this edge might be growing dull. Investors might be tempted to focus on the fact that CommVault now trades at its lowest valuations (on both a P/E and price-to-free-cash-flow basis) in more than three years, but it's also important to watch growth rates. If they keep slowing, then a cheap valuation today could become tomorrow's value trap.

Putting the pieces together
Today, CommVault has many of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.