Quickie: Cabot’s “unstoppable wave of growth” in Big Data stock

Who has delivered earnings surprises of 200% or more three quarters in a row?

By Travis Johnson, Stock Gumshoe, April 21, 2015

Last week I started looking into Cabot Market Letter’s pitch about their latest portfolio moves, including a buy of Harman (HAR) that has already jumped almost five percent since we looked at it back on Thursday (not that we or Cabot probably had anything to do with that jump) …

… and I told you I’d also work on identifying the second stock they teased as a recent buy, so let’s jump into that with a quick answer for you.

The letter they’re teasing is about to change its name, from Cabot Market Letter to Cabot Growth Investor — and they’re issuing all kinds of free special reports in conjunction with this change… so I’m not sure whether the next teased stock is one they will reveal in their next “free report” that’s scheduled to come out tomorrow or whether it’s just a “subscribers only” pick that those folks have already seen and freebies will never see (unless, of course, they come to visit us here at Stock Gumshoe).

But anyway, what’s the stock?

Here are the clues from the ad:

“The second company we added to our holdings is riding an unstoppable wave of growth as well—but only in the BIG DATA sector.

“Without getting too technical, what this company does better than everyone else (in my opinion) is help businesses of all sizes share and analyze a Mount Everest-sized mountain of data with a few clicks of a mouse. The result allows companies a better handle on streamlining their operations, adding to their bottom lines.

“Which is why the company already has more than 26,000 customer accounts (we’re one of them) in over 100 countries, including 9,100 new accounts last year alone. Which is why the company’s quarterly sales have exploded at 75% while earnings have zoomed 84%–all while delivering three consecutive earnings surprises of 200% or more.”

That’s plenty of data for the Mighty, Mighty Thinkolator, so I pulled the tarp off this morning and started it up… doesn’t love those cold New England spring mornings, but we got her going eventually and it took but a few moments of chugging through the clues to get our answer for you: This is Tableau Software (DATA)

Tableau is one of those rare beasts that has doubled twice since going public almost two years ago — but unfortunately, that second double came after a 50% drop in the shares. $50 to $100 back to $50 and now back to $100 again… that’s a stomach-churning ride for a lot of investors, particularly for a decent-sized company (their market cap is about $6 billion).

They are absolutely in a hot sector, and it’s a sector (big data analytics) in which all the pure play stocks are crazy expensive… so it should be no real surprise that they trade at a forward 2016 PE of 200 (or a 2015 estimated PE of 400), that’s about the same valuation as Splunk (SPLK), which is also about the same size (they’re not really competitors, but are in the same basic business and actually do work together to some degree).

Tableau is not a data processing company, really, but they build software that’s designed to make data more usable through visualization — essentially, combining lots of data from different sources (including Splunk, or your Oracle databases, or whatever) and making it visually useful, comprehensible and, one hopes, actionable with different kinds of charts and reports.

There are a lot of stocks in the “big data” space, but sentiment really runs hot and cold on them as trends come and go so it would probably behoove you to read up quite a bit on the sector and understand what each company is doing (and what their prospects are) before throwing money after a $100 stock that is only expected to earn 25 cents in profits in 2015. It may turn out to be a fantastic company, I certainly don’t know them well and have only really scanned their financials and basic website info, but that’s a lot of money — and past big data superstars that have fallen on hard times, like Teradata (TDC) or Tibco (TIBX) also, at one point, seemed like they could only grow to the sky… as did Splunk and Tableau in early 2014, before each of them got cut in half and then rebounded (Tableau much more forcefully than Splunk) to today’s prices.

“Beat and raise” companies can certainly keep going up even if they’re at crazy valuations, as long as they continue to “beat and raise” each quarter, and it helps that they’re a software company because software is among the most easily-levered sectors (other than hiring some additional sales staff, it doesn’t cost much to increase your customer base from 10,000 customers to 100,000 customers, the sunk costs of software development are the same — which is why their gross margin is so high at 90%+), but companies that trade at triple-digit PEs are very, very sensitive to even seemingly mild changes in investor sentiment or analyst projections. Analysts are all over the map, too, with a huge range of estimates for future earnings (this year’s estimates range from 15-77 cents in annual earnings, for example), so there’s obviously a lot of unpredictability in this growing company’s prospects.

For the next quarter, which will come out in about two weeks (May 7 is the scheduled date), analysts are predicting a loss of three cents — so they can post a 200% earnings beat again by earning just three cents the way most folks (like Yahoo Finance) calculate. Part of the magical math of stocks that are hovering just over break-even is that small improvements give fantastic percentage “beats.” The fourth quarter has usually been their biggest seasonally in terms of revenue and earnings, but every quarterly report has a huge impact on share price when you trade at this kind of valuation.

Big data is definitely growing, I’m not one of their customers but these all look like fantastic platforms and tools for collecting and visualizing data… and I have no idea what the competitive landscape is like. This is also the home to hot startups of every stripe, private companies with real strength in some areas (like the oft-teased Palantir), and the focus of many of the big tech “dinosaurs” who continue to try to reinvent themselves and maintain their ownership of the enterprise market (including IBM probably most notably, but also HP, Oracle and others)… to say nothing of the prior wave of “big data” stars like Tibco and Teradata and others.

And… that’s all I’ve got on this one. I like that their visualization software works