Please ensure Javascript is enabled for purposes of website accessibility

This Just In: Time to Sell Tableau Software and Buy Splunk?

By Rich Smith – Feb 3, 2016 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One analyst thinks so -- and highlights a growing threat from Microsoft.

Tableau Software (NYSE: DATA) investors beware -- Microsoft (MSFT -1.27%) is about to eat your lunch. At least, that's what Maxim Group says.

In a paired buy/sell move on Wednesday, the New York-based investment banker announced it is initiating coverage of Tableau with a sell rating and a $70 price target. (Tableau currently costs closer to $79 a share). On the plus side, Maxim sees a brighter future for big data rival Splunk (SPLK -2.70%). Assigning nearly the same price target as it gave Tableau, Maxim sees a much better profit opportunity at Splunk -- whose shares cost only $46 and change.

But why?

The news
Microsoft had a miserable fourth quarter, no doubt about it. But much of that was due to the flop that is its Windows Phone business. In contrast, my Foolish colleague Tim Brugger says that Microsoft is making great strides in cutting edge fields like artificial intelligence. More importantly to the Tableau sell thesis, Maxim Group is warning that Microsoft now has assembled all the tech it needs "to render Tableau the next Netscape" in the big data space.

In contrast, the analyst likes what it sees at Splunk -- despite the fact that neither Tableau nor Splunk is currently profitable, and that Tableau actually outgrew Splunk in the revenues race last quarter, putting up 64% growth to Splunk's 50%.

Given the companies' relative performance, what are the chances Maxim Group is right to like Splunk, and dislike Tableau?

Let's go to the tape
Initial indications do not look great. According to our data on Motley Fool CAPS, where we've been tracking Maxim's performance as an analyst for close to 10 years now, Maxim's picks are rather hit-or-miss.

On average, only about 38% of this banker's recommendations have succeeded in outperforming the S&P 500 over the past decade. On the other hand, Maxim's record in picking Internet software and services stocks in particular is quite a bit better. According to our records, 47% of Maxim's picks in this sector have outperformed the market -- and by some pretty astounding margins:

Image source: Motley Fool CAPS.

But does this mean that Maxim is right about Splunk and Tableau as well?

Valuing the big data crunchers
It's hard to say. While neither of these company currently sports "GAAP" net profits to base a valuation on, both are generating pretty sizable piles of cash from their respective businesses. According to data from S&P Capital IQ, Tableau generated about $73 million in positive free cash flow over the past 12 reported months (against net profits of negative $22 million).

Splunk arguably did even better, generating $103 million in FCF (versus an apparently worse GAAP result -- net losses of more than $256 million).

Valuation-wise, both stocks cost about the same. Tableau shares have a $5.8 billion market cap; Splunk, $6 billion. In fact, when you factor cash reserves and debt into the picture, the firms have almost identical enterprise values -- $5 billion each.

Relatively speaking, the fact that Splunk is generating 41% more cash on its $5 billion enterprise value than Tableau is generating on its $5 billion enterprise value, means that...Maxim is probably right! Splunk actually is the cheaper company. (Albeit, at an EV/FCF ratio of 48.5, it's not exactly cheap, period). The fact that Splunk is also expected to grow faster than Tableau -- 40% versus 36%, respectively, according to analyst estimates on Yahoo! Finance -- further reinforces the case for selling Tableau, and using the money to buy Splunk shares instead.

The upshot for investors
I can't in good conscience recommend paying 48 times free cash flow, or more, for any company in a business like big data, where new companies are emerging to disrupt the market every day -- and where, as Maxim points out, even old companies like Microsoft may join the fray. But on balance, if I had to buy just one big data company today...

Splunk would be it -- and Tableau would not.

Rich Smith owns shares of Baidu. The Motley Fool owns shares of and recommends Baidu and Splunk. The Motley Fool recommends LivePerson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$237.92 (-1.27%) $-3.06
Akamai Technologies, Inc. Stock Quote
Akamai Technologies, Inc.
$81.11 (-1.19%) $0.98
Splunk Inc. Stock Quote
Splunk Inc.
$81.03 (-2.70%) $-2.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.