Informatica Corporation is a California-based company with a market cap of roughly $4.2 billion and annual sales above $900 million. It provides its clients with enterprise data integration and data quality software and services, and is considered to be the leading independent player in the industry.
Once focused on data warehousing products and services, the company is now moving towards higher-value data integration products and services, a market that is still nascent. This should help ameliorate margins over the medium term.
Furthermore, this business could improve the firm’s cross-selling capabilities (which are not fully developed yet) and the potential to reach new customers in the integration market, as companies increasingly tend to replace in-house solutions with neutral platforms, like Informatica´s. In fact, leading IT research and advisory firm Gartner recently qualified the company´s products as the most visionary in the Master Data Management of Product Data Solutions segment.
IBM (NYSE:IBM), SAP (NYSE:SAP) and Oracle (NYSE:ORCL) are some of Informatica’s major competitors. However, several of them (SAP and Oracle, among others) are also important OEM partners that buy platform-neutral products from the software company. In fact, platform-neutrality might be its largest advantage over the industry behemoths going forward, especially as data warehousing products become commoditized.
Informatica is not one of the most profitable companies in its industry. With a net margin of 11.5%, it stands slightly above the average. On the other hand, some of its main competitors, the major application software companies, provide better margins and returns.
|Company Name||P/E||P/B||P/S||Mkt Cap||ROE||Net Margin||Operating margin|
|Intl. Business Machines||12.20||10.41||1.83||191.73B||85.15||15.89||20.96|
|Tibco Software Inc.||45.77||4.36||3.84||3.91B||13.92||11.92||17.34|
|SAP AG (ADR)||22.96||5.03||4.51||96.76B||21.02||17.40||25.01|
As you might have noticed, Informatica is not very attractive in terms of valuation either: The price is up more than 25% year-to-date. At 55 times its earnings, it trades at more than three times the valuation of most of its largest peers. So, even if growth rates come in better than its competitors’, the stock price seems unjustified.
On the other hand, the average price target among analysts is $44.65. Given that the stock currently trades around $34.50, upside potential seems to be plenty for the short to medium-term.
One war or another, the fact that the company´s five largest hedge fund bulls reduced their stakes during the past quarter cannot be ignored. It seems like a better time for selling this stock that for buying it.
Although Informatica seems poised to grow in the years to come and could even carve an economic moat around its business by successfully exploiting the opportunities that it has in the data integration segment, its stock seems quite overvalued. Even considering its growth projections, its forward price-to-earnings ratio of roughly 24x widely surpasses those of its competitors.
SAP, for instance, offers almost the same EPS growth rate projections for the next five years to come (around 13% per year), at less than half the valuation. In addition, its return on equity (ROE) and margins are substantially better than Informatica´s.
So, in spite of the fact that analysts seem to like Informatica´s prospects, and stock price upside potential is abundant, its valuation makes it an unattractive pick. It seems that, once again, gurus can teach us analystsa lesson on investing.
Disclosure: Victor Selva holds no position in any stocks mentioned.