Investors don't get especially big windows to buy undervalued tech growth. While TIBCO Software (Nasdaq:TIBX) actually did look undervalued about three months ago, the stock has shot up by about one-third since then. The question, though, is whether investors should still stick with a story that looks to be improving. If TIBCO can continue to build its reputation in applications like complex event processing, visualization, and real-time business intelligence, scarcity value could continue to push this stock.
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A Strong Start to the Year
TIBCO didn't beat by a lot this quarter, but it was still a strong quarter. Reported revenue rose 23% and license revenue rose 19% on a constant currency basis, and that's good. What I think is more impressive is the 18% growth in deferred revenue.
Deferred revenue is not a perfect future proxy, but it is a strong indicator that business is solid here. It was also encouraging to see that service-oriented architecture (SOA) re-accelerated (up 22%), while business process management and optimization both grew by double-digits.
Margins also looked good. Operating income rose 28%, and TIBCO did see a little leverage on sales and marketing as it declined about 20 basis points on a percentage of sales. As companies like Red Hat (NYSE:RHT) still struggle to show marketing leverage, it's a positive for TIBCO.
Carving Out Valuable Businesses
TIBCO is a small fish in the infrastructure software sea. Microsoft (Nasdaq:MSFT), Oracle (Nadsaq:ORCL), SAP (NYSE:SAP), and IBM (NYSE:IBM) are substantially larger and IBM in particular has a very sizable share in the SOA market.
It's to TIBCO's credit, then, that they try to position themselves for where the market is going. The company has good exposure to growth segments like analytics and social enterprise software, and solid positioning in real-time intelligence and complex event processing. As enterprise data demands increase, that exposure should become even more valuable.
I will be curious to see if TIBCO goes into play at some point in 2012. Analytics is one of the big must-have components of the evolving Big Data theme and it would seem that any of the big players could benefit from adding TIBCO. What's more, there just aren't that many quality middleware companies left to buy anymore.
The Bottom Line
On the assumption of nearly 13% in compound free cash flow growth over the next decade, TIBCO looks fairly-priced today. Given TIBCO's scarcity value and market position, I suspect that a meaningful discount to fair value is only going to show up if the company significantly disappoints the Street and/or if the market goes "risk-off" and sells down tech indiscriminately.
As a result, names like EMC (NYSE:EMC) or NetApp (Nasdaq:NTAP) are probably cheaper Big Data plays today. That said, I'd be sorely tempted to relax my own value discipline if TIBCO shares slid back into the twenties in the next few weeks.
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.