https://seekingalpha.com/article/4175271-pivotal-trying-make…
A very interesting article from Bert - he raises many points similar to our discussion. Since people on this board have communicated with him, this might not be coincidence - he may have dug deeper into some of our topics.
His conclusion on investing in Pivotal: He is on the fence.
On the one hand he is strong on their subscription business The 158% net dollar retention rate is not surprising and is one of the strongest arguments for owning these shares.
On the other hand, he considers the services business an anchor on the shares, as contracting services revenue will continue to hide the hypergrowth of subscription business, and the low services margin (15%) will hide the huge subscription margin (90%). Now he does predict that next year’s subscription revenue will grow to 70% from today’s 56% - so the true value of the subscription business will presumably get revealed eventually, preferably a bit at a time.
Bert’s article confirms the hypergrowth thesis in subscription business. I personally think that having an additional lower margin services business is not a negative, but rather a positive, for a few reasons:
First of all, a services business not only provides additional revenue, it also provides in-house expertise in client problems. If utilized as a source of information, it’s one of the best ways a tech product company can stay ahead new trends and upcoming issues, and keep customers delighted.
Secondly, Bert mentions that the big data represents 15%-20% of the service revenue, and is both profitable and growing rapidly. Pivotal has deep expertise in Hadoop. As Bert mentions, this may be an additional sleeper asset - it would be great to see this productized into a tool set for data analytics.
I consider this article, along with Saul’s analysis, validation of my investment thesis, even though Bert is on the conflicted and not ready to recommend at the moment.
The confusion around 2 different types of revenue is the reason for the low price to revenue multiple today. As patient investors, we know that mispricing in the market leads to the best long term investments. It’s hard to know when the market will catch on, but when it does today’s investors should do very well.