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At the Dada Portfolio, we invest in a broad spectrum of high-return opportunities. We combine our aggressive stock picking with conservative portfolio management, because at the end of the day, we want each of our holdings to have a significant impact on our portfolio's upside -- but only a limited impact on its downside.
As of this writing, we have eight total positions. Most of those initial purchases have been around $500, a 3% allocation relative to the total investable capital our portfolio will receive. We like starting off around 3%, because it gives us a foot in the door while also giving us some time to get to know the stock and the story better.
Today, though, we're going to make a much bigger leap: We want to open up a 5% initial position, $800, on a new stock that's been on my radar screen for quite a while now.
Qlik Technologies (Nasdaq: QLIK ) makes business intelligence software. Sun Tzu said that "if you know your enemies and know yourself, you will not be imperiled in a hundred battles." That's what BI is all about.
Managing and operating a business without BI is like trying to hit a home run blindfolded. People are screaming at you, telling you, "Swing now! Swing harder! Just missed!" But at the end of the day, you still don't know where the ball is.
Clearly, business intelligence is important, but traditionally it's been treated almost as alchemical sorcery. The major BI providers like IBM (NYSE: IBM ) , Oracle (Nasdaq: ORCL ) , and SAP (NYSE: SAP ) have always tailored their offerings to be completely indecipherable to the average business user. Executives on the top floor could employ armies of database techies to query and decode the outputs of their machine high priest, but access to that information was essentially forbidden to common mortal employees.
In contrast, Qlik designs its software to be easy to implement, use, and understand -- easy enough that even lower-level business units can adopt and deploy its flagship QlikView product in mere months. (Traditional BI tools can take more than a year.) Once QlikView establishes a beachhead in those periphery units, the business strategy becomes what the company calls "land and expand." Qlik strives to pick up adoption throughout the entire organization the old-fashioned way: through word-of-mouth and really good results.
Assorted valuation sorcery
All this strategy talk is well and good, but the numbers really prove the point. Qlik's revenue has grown at a compound annual growth rate of 40% in the past two years. While its margins have been relatively weak, they've been increasing steadily from 2.5% in 2008 to 8.8% in the last 12 months. This should not be at all surprising; in fact, it's extremely encouraging.
The upward margin trend suggests that as Qlik continues to grow, it's been able to scale up very effectively. At its heart, it's a software company, so we expect higher margins. But Qlik's put so much into sales and marketing -- which is a very good thing, when we see those efforts yield the significant increases in revenue they've generated – that it hasn't yet reached the margin levels of a mature software company.
For prospective investors like us, that means that the company's valuation multiples are actually a bit deceptively high, and that Qlik really isn't as expensive as a cursory glance might suggest. What is Qlik worth? My quick and dirty discounted cash flow analysis, factoring in a net margin that eventually reaches 25%, spits out anywhere from $50 to $65. But honestly, I don't know.
Qlik's probably a lot more than what it's selling for right now -- and that's about as good an answer you'll get. It's certainly good enough for $800 of our money. How about you?