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 (NASDAQ:SPLK). 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.
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:
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.