Talend S.A.: Mistake To Overlook The Emerging Concerns

| About: Talend SA (TLND)


Investor hopes are high from the new data integration specialist that is using open source technologies.

Shrugging off the recent miss/miscommunication may be a mistake since the business has yet to overcome other challenges like profitability, competition or lack of scale.

With limited catalysts to offset the doubts raised by a miss or miscommunication, sentiment around the stock may continue to be weak.

Talend S.A. (TLND) stock has attracted significant investor attention, especially if one looks at the trading multiple. Investor interest is fueled by hot themes like Cloud and Big Data, but to believe that the business is completely immune or isolated from the challenges associated with the typical data integration business may be a mistake and a rich valuation, combined with other emerging challenges, does urge caution.

The Long thesis is largely built upon the company's unparalleled position in the data integration tools market, given the solutions are built on popular open source technologies like Apache and Hadoop, and with the growing number of corporations migrating away from premise-based integration tools towards open-source and Cloud-based tools, the business does stand to monetize the tailwinds associated with the same. Much of the senior management is from well-respected software companies and the business is cash flow positive on an operating basis and may continue to attract an acquisition premium because of the multi-year technological lead that the business enjoys. All in all, not an easy Short and the business may be a good buy down the road when the market appropriately discounts the challenges.

But right now, the challenges, especially relative to market expectations, seem high enough to warrant caution. Even though there is a lot of confusion about the recent results and whether or not the company has missed the Street estimates, which may be unsettling considering this was the company's first quarterly result after the public offering, the results definitely failed to impress. The unimpressive results and lack of consistent profitability stand in stark contrast to the valuation premium that the business enjoys over existing data integration tools market leaders, e.g. Informatica that was acquired for 4.5 times expected revenue by a consortium consisting of Microsoft (NASDAQ:MSFT) and Salesforce (NYSE:CRM) among others. Lack of scale, competition, etc., are some of the other challenges that the business faces, but are not fully discounted by the market.

Miss or miscommunication, both look equally bad

After a more than 20% decline in the stock price post-results, the case is being made that the earnings miss was more of a case of miscommunication due to the number of shares outstanding used in Street estimates and the Street not looking at the pro-forma numbers. If one adjusts for all those one-offs, the loss per share does come out 3-4 cents better than the estimates, but to believe that the disappointment is limited to investors not looking at the correct number in the press release may be naive, if not completely misguided.

First of all, if one looks at the background of the senior management, which includes experience at investment banks and venture capital firms, it will be hard to believe in miscommunication or poor Street management thesis alone. Secondly, the guidance of a net loss of $0.93-1.01 per share for the year against the estimates of 97 cents is hardly impressive. With sales of barely $100 million for the year, a relatively smaller scale is another challenge that may continue to haunt the business for a while, especially in light of the strength of competitors in the space, i.e. names like Informatica, IBM (NYSE:IBM), SAP (NYSE:SAP) and Oracle (NYSE:ORCL). Although correcting fast, but the shortage of employees with deep experience in open source technologies is another factor that has the potential to rock the boat and needs to the watched.

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.

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