A Pivotal Play in PaaS

05/30/2019 5:00 am EST

Focus: TECHNOLOGY

Briton Ryle

Editor, The Wealth Advisory

Brought to you by the venture fund that led Twilio (TWLO) to market, Pivotal Software (PVTL) is fast becoming a top competitor in the platform as a service (PaaS) industry, asserts Brit Ryle, editor of The Wealth Advisory.

The company was founded in 2013 to create a platform that would make it easier for developers to design and launch new programs and other platforms.

Its cloud-native platform, Pivotal Cloud Foundry (PCF), accelerates and streamlines development by reducing the complexity of building, deploying, and operating cloud-native and modern applications.

The company also enables its customers to accelerate the adoption of a new and modern software development process using PCF through a secondary strategic service, Pivotal Labs (Labs). Not only does the company help create the new process, but it also helps keep it running on all cylinders as well.

As I said, there are a lot of companies out there trying to capitalize on the growing platform economy. And it can be tough to tell who’s really worth the investment.

Some are making tons of money already. But most of those are already very expensive. You’re paying $40 now for future cash flows around $15. That’s very overvalued. But there are a few that are making money, growing fast, and still flying under the radar. And Pivotal is one of those.

The company’s been growing revenues at an average of 33% per year for the past three. And while analysts don’t expect that rate to continue, they’re not seeing it back off much, either. Predictions are for average revenue growth around 20% for the immediate future.

But it’s the earnings growth that’s really impressive. Pivotal is expected to grow earnings by 30% a year for the foreseeable future. That’s versus an industry expected to grow at 17%.

Putting it plainly, in an overpriced field, Pivotal has managed to stay affordable. It’s trading at a P/S multiple of 8 right now. Other companies growing that fast in this industry are sporting ratios closer to 20.

But a cheap price relative to sales and the industry isn’t the only thing that’s got me excited about Pivotal. The company’s platform, PCF, is already one of the top development platforms on the market. It competes with the big ones like Amazon Web Services.

But it’s still in its infancy, really. As analysts at Wedbush recently put it, Pivotal is getting pushed forward by “massive tailwinds.” The company is already on a clear path to profitability over the next few years.

And investors are missing that. And businesses continue to shift toward cloud-based applications, driving more and more revenue growth for Pivotal.

It’s rare to find a PaaS company that’s growing this fast and yet valued this low. Even conservative estimates have revenues growing by double digits for the foreseeable future. And earnings are expected to rip higher.

Shares took a hit earlier this year after a mixed earnings report. That gives us an opportunity to buy in nearly 30% off the stock’s 52-week high.

I'm expecting another Tiwlio-like run. The platform economy is here, and it’s only getting bigger. We’re going to ride the trend until all the profits are in the bank. Pivotal Software is a “Buy” under $22.50. I have a 12-month price target of $50.

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