Have The Odds Improved For Tableau?

| About: Tableau Software (DATA)

Summary

Tableau's growth so far.

Looking out to 2020.

Zero margin of safety.

Some time back I penned an article pointing out that Tableau's (NYSE:DATA) market price reflected exuberantly optimistic expectations. When that article was written, Tableau's market capitalization was about $8 billion. As of this writing, the company's market capitalization is roughly $3 billion. Much of the haircut has occurred in the past few days.

After such a precipitous decline it is useful to revisit the company and see if pricing is more rational. Of course, there is now also some additional data available.

Tableau's growth so far

2015 2014 2013 2012 2011
Operating income ($52) $6.3 $3.6 $4.2 $3.9
Cash from operations $136 $89 $37 $14 $13
Click to enlarge

A couple of comments are in order. Although cash from operations has increased at a steady clip it needs to be noted that most of this cash is coming from stock-based compensation - for 2015 stock compensation expense was about $120 million. This is not a discretionary expense - salaries have to be paid (in fact if the stock price suffers the sort of calamitous decline that Tableau's did, more employees might ask for cash based compensation rather than stock).

Regardless, Tableau is not a company from the dot-com bubble. The company has a real and solid product and does have sales. It is currently young and the case can be made that the company needs to focus on generating revenue and profitability will come later. I do not subscribe to this school of thought, however such a case can be made (rationally).

Looking out to 2020 through an optimistic lens

Thus, let's take a look at Tableau's revenue, then estimate how much revenue might grow in the next five years and what margins might look like, and use this to make a judgment call on Tableau's current valuation.

Tableau's 2015 revenue was about $653 million. Let's assume that by 2020 the company has revenue of $3 billion. This is in line with the company's past growth rate (as well as my previous article). Conveniently, this implies the current market price is 1x our expected 2020 revenue.

Now the important question is what sort of margins would it be reasonable to expect the company to make in 2020? I hope the reader will agree that if the company is unprofitable in 2020 (with revenue of $3 billion), then there is a good possibility that the company's business model is broken.

In my opinion, it is reasonable to expect a software company to have earnings margins in the 10%-20% range, with the upper end reserved for very dominant products with limited competition and a vice like control of market share.

Tableau competes with heavyweights like Microsoft, SAP (NYSE:SAP), Oracle (NASDAQ:ORCL), IBM (NYSE:IBM) and the SAS institute. In fact, Tableau is pitched as an "Excel killer." The point is that expecting 20% margins would appear to be overly optimistic (on top of the assumption that growth will continue at the same blistering rate as the past but off a much larger base).

Thus, an investor looking for a modicum of a margin of safety should probably assume a 10% margin. Note that this may still be too optimistic and even if it is not, it is built on rather optimistic assumptions about revenue growth.

Regardless, with a 10% margin and our $3 billion revenue assumption, purchasing Tableau at current prices is equivalent to purchasing a business that in 2020 might yield a 10% return on the original investment (made in 2016).

Margin of safety

Perhaps the most positive thing that can be said about Tableau's current market price is that it doesn't appear to be particularly irrational. However, even at these prices a number of good things need to happen for it to turn out to merely be a satisfactory investment.

Consequently, I reiterate the opinion from my original article - at current prices the company is still a speculative play/gamble. However, the odds on this lottery ticket have improved significantly in light of the current decline.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.