This is the first segment of a two-part article about
here to view Part 2, titled
DataWatch is Cheap at $28.
I love investing in a small company undergoing a transition.
The reason is simply because investor perception and can be
incorrect, and that can create a huge opportunity for value
One company that is ripe for profits is
. The company is transitioning to become a leader in "big data."
Thanks to this transformation and the company's small market
capitalization of just $185 million, investors haven't yet
recognized the big opportunity with the stock.
So what's happening at DataWatch? The company has a new
management team from IBM at the helm and an acquisition that will
revamp its product portfolio.
Revenue growth will be ramping up next quarter. And the
valuations of competitors indicate that this stock could double
Two of the most successful recent IPOs were
. Both are software companies competing in the space of
enterprise analytics, providing easy access to big data in
real-time. Because of a major paradigm shift towards the use of
visual tools for analyzing data, these stocks have received
exceptionally high valuations from Wall Street.
Splunk had its IPO in early 2012. It trades at 27 times
trailing sales and is valued at $6.5 billion. Meanwhile, Tableau
went public in 2013, trades at 23 times trailing sales and is
worth $3.9 billion. Neither company is profitable.
Why is the Street giving these companies given such lofty
valuations? There are three main reasons:
High gross margins of more than 85%
Recurring revenues business model
Early innings for "Big Data" industry
Demand for the products and solutions from big data companies
like Splunk and Tableau is rapidly growing, and has resulted in
incredible growth over the past year. Splunk is on pace to grow
revenue 41% in 2013, Tableau almost 100%. These are great
companies with bright futures, but unfortunately it appears as if
Wall Street has already priced the bulk of their success.
. This is a little company that went public in 1992 and is valued
at just about $250 million. Here's the catch: since 2011
DataWatch has been undergoing a major transformation to compete
directly with offerings from Splunk and Tableau.
This transition has been led by an all-star management team,
with a track record of numerous buyouts in the big data analytics
space. In 2011, DataWatch hired Michael Morrison as its new CEO.
Morrison came with years of executive experience at Applix,
Cognos and IBM.
Morrison was first the COO of Applix, which was bought out by
Cognos in 2007 for $339 million. Just a couple months after the
acquisition, IBM bought out Cognos for $4.9 billion. These were
all enterprise software companies specializing in business
analytics, exactly where DataWatch now competes. Not a bad track
record, especially given DataWatch was worth well under $100
million when Morrison took his position as CEO.
It may seem hard to imagine why five industry leading
executives would all leave their current positions to work for a
tiny company like DataWatch. I'm impressed by what they've
accomplished. In just two years DataWatch has transformed from an
outdated niche software vendor and become a dynamic real-time
A large part of that shift is due to the recent acquisition of
Panopticon Software, a Swedish company specializing in the
visualization of real-time big data analytics. DataWatch
announced the acquisition in June, and it was completed in late
August. The all-stock deal was done and on the conference call,
Panopticon's management specifically pointed to DataWatch's low
valuation as the rationale for selling the company in an
Industry experts were quick to rave about the acquisition.
Philip Howard of Bloor Research sums it up nicely in a
: "DataWatch … isn't very sexy … Panopticon, on the other hand,
Panopticon doesn't just sound like a trendy software company.
But its numbers are impressive. Although concrete financial
data will be tough to find on the company until DataWatch
announces its third-quarter results, we do have a couple of hints
to work from. On the original conference call it was noted that
Panopticon produced $5 million in revenue in 2012, an increase of
Although it's very small, Panopticon grew faster than both
Splunk and Tableau in 2012. Ironically, DataWatch got this higher
growth, for just a fraction of the cost. When it was announced,
the deal was worth $33 million, meaning DataWatch paid just 6.6
times sales. That translates into about 25% of the valuation
multiple of these better-known competitors.
But what really makes me excited is the potential of combined
product offerings from DataWatch and Panopticon. DataWatch has
over 40,000 customers, including 99 of the Fortune 100 companies.
Meanwhile, Panopticon has just 75 customers. It's safe to assume
that Panopticon's customers are signing much bigger contracts,
similar in structure to what Tableau and Splunk typically
If DataWatch can successfully integrate its new offerings and
sell Panopticon's software to its 40,000 customers, there is huge
potential for growth. Even if DataWatch can only sell 1% of its
customers the Panopticon services, the business could grow by a
factor of four.
Learn more about DataWatch, and why I think the stock could
rise by 50%. To
read Part 2 of this article, click here:
DataWatch is Cheap at $28.
Disclosure: Galileo Russell and Ian Wyatt personally
own shares of DataWatch.