Qlik Technologies (QLIK, Financial) reported weak revenue, but the print was much better than Tableau Software (DATA, Financial). Does this mean Qlik is a better big data play than Tableau?
Not exactly.
In fact, all of the business intelligence and data visualization companies are declining in profitability whether their sales are growing or not. To anyone who knows how markets work, this is entirely unsurprising – and another reminder that all of these companies are best shorted or avoided.
The numbers and the competition
Qlik Technologies reported 12.4% year-over-year revenue growth to $205.5 million in Q4, with EPS of 31 cents, while positive, was 7 cents below expectations. More of a concern, the company’s Q1 guidance of -12 cents to -14 cents EPS is below -8 cents expected, while revenue guidance (at $695 million to $705 million versus $718.8 million expected) is also a disappointment.
The company’s short-term, seasonal profitability sits against a backdrop of losing money – and the losses have more than doubled on a year-over-year basis for the last four quarters. Most concerning, other data visualization specialists such as Tableau, Datawatch (DWCH, Financial), Splunk (SPLK, Financial) and bigger companies entering the industry – IBM (IBM, Financial) and Oracle (ORCL, Financial) – have seen EPS declines in the last four quarters.
Many tech investors bet on revenue growth in the hope of earnings coming later, but the chart above shows that all data visualization firms, whether diversified in other big markets (IBM, Oracle) or seeing strong revenue growth (Splunk, Tableau Software) are still seeing EPS declines. All of these companies, except IBM and Oracle, remain unprofitable.
Earnings, not sales, driving stock performance
It’s no surprise, then, that a derisking market like the one we’re currently in is not rewarding companies that fail to deliver sustainable, growing profits. In such markets momentum stocks like these will be punished if they cannot show positive cash flow; thus in the last year, these stocks have lost between 19% (Oracle) and 59% (Tableau Software). We can also see that Tableau Software, with the biggest stock decline, also saw the biggest EPS decline, while the best performer, Oracle, also had the least extreme EPS decline. The tight correlation between EPS declines and stock declines suggests that betting on revenue growth no longer works for these firms.
Looking at the chart above, we see that EPS and stock performance are entirely directly correlated, while revenue and stock performance are almost entirely inversely correlated. This is extremely unusual for a high tech sector, where sales and stock performance are closely related (good examples of this are Amazon [AMZN], Netflix [NFLX] and Tesla [TSLA], which have little or no profitability and tremendous sales growth and long-term stock performance).
What this tells us is that the data visualization software market is trading on value-based fundamentals, not simple growth. This is important because all of these companies are seeing huge earnings declines.
Of course some are suffering more than others. Tableau’s tremendous earnings decline – down over 1,300% in the last four quarters – is a result of heavy investment in selling and research and development. This is not necessarily a sign of future earnings growth but is clearly an investment in increasing revenues. There is good reason to believe the initiative will be successful; if the company improves its offerings and markets more aggressively, it may steal share from Qlik Technologies and others.
That doesn’t mean it will increase earnings for the same reason that data visualization is unlikely to yield profits for anyone.
Econ 101: Barriers to entry
Barriers to entry are how companies make profits. If your business is easily replicated, competition will increase and you will have to cut prices – as will your competitors, until profits go to zero.
In economics, this is known as a zero-profit condition, and companies can avoid it through a few strategies. One is branding. IBM is an excellent example. The company has gone from making typewriters to computers to mainframes to business services because the IBM brand has come to signify durability, reliability and knowledge.
Another approach is market cornering, such as Comcast’s (CMCSA, Financial) de facto monopoly in cities where citizens cannot choose between competing ISPs. A third way is to have a “secret sauce” that makes your product unique or the industry standard. Coca-Cola (KO) and Kentucky Fried Chicken (Yum! Brands [YUM]) are examples of brands that protected themselves from competition by having top secret recipes, but tech is full of companies with a similar secret sauce, like Google’s (Alphabet [GOOG]) algorithm or Microsoft’s (MSFT) top-secret code and limited compatibility for its Windows operating systems.
The problem with Tableau Software, Qlik Technologies and other BI visualization companies is that they have none of these. None is necessarily a trusted brand among IT professionals, although customers do value them. They don’t have a monopoly, since they don’t own or control the data they analyze. And they don’t have a secret sauce or an industry standard, since creating a data visualization software platform is actually not that difficult – and many small startups (as well as big firms like IBM) continue to compete against Tableau Software and Qlik Technologies.
We can’t say this will result in Tableau Software's and Qlik Technologies' margins approaching zero since both are already operating at a loss. We also can’t say either company will be able to establish a big data standard that will make it the industry leader as there’s no indication that the market needs or is willing to accept a standard.
What this means for investors is clear: Although Qlik Technologies is down “only” about 7%, investing on the expectations of positive EPS and a strong return in the long term is a fool’s errand. Or if you’re betting on the stock on the greater fool theory, you might find yourself holding the bag if you hold on for much longer. A wiser bet may be to avoid the highly competitive market of data visualization entirely.
