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I can spot a top when I see one and this stock just peaked. I've been circling this name for a while and scratching my head at its valuation. This is because CVLT (CVLT) is a good old-fashioned enterprise software company and not some crazy, impossible to value SAAS name. It sells back-up/recovery focused data information management products into the enterprise space where it competes directly with the likes of Symantec's (SYMC) Netbackup and EMC's (EMC) Avamar. This is a very crowded space with all the usual suspects, and CommVault has been doing a great job over the last two years taking share. Now while I would like to get a lot more into detail this is an ACTIONABLE idea so getting this out in time is key as I believe the conference call just rang the bell. So I will give you an abridged thesis...

Short this because...

1) Takeover Bid Fizzling - This stock has had a takeover bid under it ever since big data got rolling, but that bid is fizzling fast. Dell (DELL) buying AppAssure and Quest means a 20% revenue OEM partner just became a competitor. Furthermore, the name tossed around to buy them is usually IBM (IBM), which I think will never happen. CommVault is the old AT&T (T) Networks division, and its product is thus built on legacy architecture, though it does have a single source code advantage over competitors. At its core it pre-dates cloud/virtualization, and thus would make little sense from a technology perspective for IBM. If IBM wants to buy something to boost its portfolio it will be cutting edge or native to virtual. Think VEEAM or Actifio. Furthermore, even if it were to want to grab a nice share with a CVLT takeover, the current price is ridiculous. At $4 billion market cap this company is trading 50x trailing EBIT or an EV/EBIT of 43x. Sorry, but even 25x would be pricey for this company in this very crowded space.

2) Fiscal 2013 Was a Leverage Year/ 2014 is an Investment Year- CVLT generated 64% EBIT growth in fiscal 2013 on the back of 23% revenue growth. How did it do this? Huge margin expansion. What has management stated won't happen this year? If you guessed margin improvement, you are a genius. 2014 is being dubbed an 'investment year' which if you've traded enough momentum stocks in your life is code for GET THE HELL OUT. With 2/3 EBIT growth coming from margin expansion last year and revenues only expected to increase 15% this year you are looking at one expensive plain vanilla software stock (56x forward as of now).

There you go. It doesn't get easier than that. I can also add that the tone on the conference call was clearly more cautious with management emphasizing greater execution risk, and a base forecast that is contingent on 2nd half pickup in enterprise spending. (I would strongly recommend listening to the CC replay or reading the transcript once available as listening to this is the best way to understand what got me so excited to go after this name.) All this to hit consensus numbers, which call for 15% revenue growth and 10% EPS growth. But what stood out even more, which is my impetus for shorting right now, was their very clear message on margins. And that message was, "don't expect any help here as we invest for 2015 and beyond over the next twelve months." Which brings me back to the simple point that the market, which is infinitely stupid when margins are expanding for tech stocks and extrapolates many years forward, will now have to look at what was 70% earnings growth in the rearview mirror, and realize that something close to 10-15% is a best case scenario for the next year. Not the end of the world, but for investors who have been riding this wave for the past two years that is tantamount to the fasten seatbelt sign being turned off once a plane has come to a complete stop. ......See Ya!

Source: Akram's Razor: Short CommVault Now