Salesforce.com Bought Tableau, But You Should Buy Microsoft

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About: Microsoft Corporation (MSFT), Includes: CRM, DATA
by: Damon Verial
Summary

Salesforce used its overpriced stock to buy an even more overpriced company.

The acquisition is highly logical once you understand that Microsoft is now Salesforce's main opponent.

Still, Microsoft is the best buy in the business intelligence sector.

So, Salesforce.com just bought Tableau (NYSE:DATA), and investors in both stocks are wondering what to do next. I want to throw my hat into the tableau of analysts who think they know the best way to play this news. Let’s start with a picture that includes Microsoft (NASDAQ:MSFT):

(Source: Damon Verial; data from Yahoo Finance)

Microsoft?

Clearly, MSFT has been the winner here, with the only Sharpe Ratio above one and the smallest drawdowns, both average and max. MSFT also offers the lowest volatility here. It all seems great for MSFT – but why are we talking about MSFT?

Because Microsoft has been the market leader in business intelligence for the last two years. Tableau was the market leader but fell behind Microsoft quite recently. As per Gartner’s research, Tableau has fallen behind, making the Salesforce purchase a sort of saving grace for a company struggling to maintain its market lead.

Here is the story of the rise of Microsoft’s Power BI relative to the struggle of Tableau (ironically displayed via Tableau). This is 2015, when Tableau was head-and-shoulders above the rest:

(Source: Interworks)

In 2016, we see Microsoft rise to a market leader status, along with Qlik, which was acquired by private equity firm Thoma Bravo the same year:

(Source: Interworks)

That brings us to 2019, where Microsoft has become the market leader, having surpassed Tableau in 2017:

(Source: Interworks)

While many are asking why Salesforce would buy such an overpriced company, the answer is quite obvious: Should Salesforce (note its presence in the 2019 chart above) effectively assimilate Tableau, the combination would give Microsoft a good fight. At the very least, the buyout saves Tableau from being dispatched as a market leader by Microsoft.

Salesforce’s Major Problem

One of Microsoft’s competitive advantage is its BI stack. Salesforce runs entirely on Oracle (NYSE:ORCL) databases. This can be a problem, both for Salesforce and for its clients.

Most notably, this presents security concerns. Essentially, clients give Salesforce their data, but Salesforce is unable to handle all that data itself, instead passing it to another company. For clients working with sensitive data, this can be a concern large enough to where they choose Salesforce’s competitors over Salesforce. In addition, without a BI stack, Salesforce is unable to integrate all types of data.

Salesforce has signaled many times that they wish to break free from Oracle. Being so, the Tableau buyout is much more easily understand: Tableau has a BI stack. The acquisition of Tableau gives Salesforce the opportunity to position itself as a true competitor to Microsoft’s BI – allowing clients to run a full, integrated data infrastructure.

A New Challenger

If Salesforce integrates Tableau to where users can both integrate all data and store data themselves (as opposed to the cloud), this will give Salesforce a competitive advantage over Microsoft (which stores data on the cloud). However, this must be performed quickly, as Microsoft is reaching out to many enterprises, both pushing Power BI and gaining feedback, the very same feedback that has led to its rapid growth in this market. I believe the potential is there: Salesforce has the marketing skills to rival Microsoft, while Tableau has the technological prowess that rivals Microsoft.

The combination clearly puts the Salesforce/Tableau combination as the largest threat to Microsoft yet. So, while Tableau might be overpriced by traditional financial analyses, the buyout might make sense when you consider the long term. In addition, Salesforce bought Tableau with stock, which itself is overpriced.

Still, this news hardly justifies the prices for CRM and DATA. I refer you to my discounted cash flow (DCF) analyses for these three stocks. The trends are clearly different – like the first chart in this article, one of these is not like the others:

(Source: Damon Verial; data from ADVFN)

(Source: Damon Verial; data from ADVFN)

(Source: Damon Verial; data from ADVFN)

Clearly, the valuation trends for CRM and DATA are increasing quickly, while MSFT’s is tapering off. As I look at these charts all day, almost every day, I can tell you I have seen this pattern before. When the stock is consistently above the DCF value, it's being driven by hype, itself driven by real growth. However, this tends to be a trend in stocks with large drawdowns, while the opposite (DCF values consistently above the stock price) is associated with slow but reliable momentum.

Indeed, compare Microsoft’s growth rate:

(Source: Damon Verial; data from ADVFN)

With that of CRM:

(Source: Damon Verial; data from ADVFN)

The most reasonable conclusion here is that Salesforce is attempting to fight Microsoft in this market. The buyout of Tableau changes Salesforce potential in this market. However, this hardly justifies its price relative to its fundamental metrics.

Conclusion

Right now Microsoft is the smarter bet in the business intelligence game. Not only is it already the market leader, but the stock itself outperforms CRM’s and DATA’s by many measures. I would like to say that CRM is a good buy, as I believe the acquisition was smart, but “one day might be a good competitor to Microsoft” hardly justifies a 100x price-to-earnings ratio.

I think that MSFT is fairly valued, but I also expect a pullback. I’d buy on the dip if you want to invest in BI. As for CRM, if you want to speculate, go ahead and buy now. If you want to invest, you should probably wait for a month or so, as Salesforce makes its goals with the Tableau acquistions more clear.

On a final note, both MSFT and CRM are showing gaps in their charts. The former shows an up gap on buying pressure. The latter shows a down gap on news reactions.

Bonus: Gap Analysis

Both look like area gaps to me. My backtest agrees. Here is the return expected for buying this gap in MSFT:

(Source: Damon Verial; data from Yahoo Finance)

Most are clearly area gaps. On occasion, we see large profits in buying these gaps. Those are the breakaway gaps, and they almost make up for the losses in the area gaps. If you want to play this gap, go short but hedge your upside risk. If you want to buy MSFT, consider waiting for a pullback.

Here are the backtest results for CRM’s gap:

(Source: Damon Verial; data from Yahoo Finance)

This is most likely an area gap. You can go long here, but an options strategy is the best method, considering the uncertainty in CRM after its Tableau buyout. If you want an options strategy for this gap play – or even the MSFT gap – feel free to contact me.

For now, the final word for investors eyeing business intelligence: Buy MSFT after the gaps fill; hold off on CRM, as we wait for more details.

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.