Five Tech Stocks in the Takeover Sweet Spot

03/02/2018 5:00 am EST


Rob DeFrancesco

Founder, Tech-Stock Prospector

Within the tech sector, the sweet spot for M&A tends to be in the market- cap range of roughly $1 billion to $2.5 billion, as targeted companies at that size usually have reached a meaningful revenue level, while still offering respectable top-line growth, explains Rob DeFrancesco, editor Tech-Stock Prospector.

In the year ahead, software is a sector where I think we’ll see an uptick in takeover deals.

Talend (TLND), a provider of data integration solutions, is one name that has the potential to generate some buyout interest. The stock is down 22% from the November high of $46.32 even though the company in the latest quarter delivered 40% revenue growth.

At the recent market cap of $1.04 billion, Talend shares trade at 5.4 times the forward consensus revenue estimate. If the company this year is able to put enough sales capacity in place to meet demand, expected top-line growth of 30% could prove to be conservative.

Shares of Hortonworks (HDP), provider of a data management software platform tied to opensource Hadoop, have declined 22% from the January high of $22. In early February, Hortonworks reported impressive Q4 revenue growth of 44%.

However, the market did not like that the company offered conservative 2018 revenue guidance of $322 million to $327 million, below the consensus of $327.9 million. With the market cap down to $1.2 billion, the stock now trades at just 3.7 times the guidance midpoint.


Everbridge (EVBG) provides a cloud-based software platform used to automate and manage the operational response to critical public safety threats and disruptive business events.

In the latest quarter, revenue growth accelerated to 37% from 35% in the previous quarter. The stock has fallen as much as 12.6% from the January high of $33.85. At the recent market cap of $871 million, the forward price/sales ratio stands at 6.6.

In the cloud-based payroll & human capital management (HCM) software space, Paylocity (PCTY) is on track to deliver fiscal 2018 (June) revenue growth of 23.4%. The company is steadily building out its product portfolio, recently adding modules covering compensation and employee surveys.

Paylocity shares are down 18% from the all-time high of $53.96 reached in October. With the market cap now at $2.3 billion, the forward multiple on the FY’19 consensus revenue estimate of $452 million (estimated growth of 22%) is 5.1.

Another possible takeover target is Alteryx (AYX), which is on our Watch List, is a provider of a cloud-based, selfserve data prep and analytics platform. In each of its last two quarters, Alteryx has generated top-line growth of 52%.

The stock has fallen 19% from its January high of $31.60. At the recent market cap of $1.5 billion, Alteryx trades at 8.5 times the 2018 consensus revenue estimate of $175.5 million, which indicates growth of just over 36%.

Among larger software companies that could attract a buyer, portfolio holding Splunk (SPLK, $86.83), a provider of machine data monitoring & analytics solutions, represents an attractive target. A big legacy vendor looking to buy some growth might be interested in Splunk.

The company looks capable of delivering 25%+ growth even as annual revenue is on pace to exceed $1.5 billion. With the market cap at $12.2 billion, Splunk shares trade at 7.8 times the FY’19 (Jan.) forward revenue estimate.

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