Informatica Stock: Same Same, But Different
The finance industry can be as fascinating as it is boring. A prop trader in Canary Wharf will have a very different experience in the finance industry than a back-office manager in Mumbai. Peel back the layers of the finance onion and you’ll come across many innovative methods of making a living, some getting less attention than others. One lesser-known lucrative niche is that of private equity.
According to Morgan Stanley, the private capital market was valued at around $7.4 trillion at the end of 2020. Not to be confused with the venture capital market, private equity is largely made up of institutional investors who have a much lower risk tolerance than the venture capitalist who expects one of ten seed-funded companies to successfully exit. Oftentimes, a publicly traded company will be trading at bargain valuations and private equity firms will acquire it. One recent example was Blue Prism.
Taking a Public Company Private
Blue Prism is a robotic process automation company whose CEO openly bemoaned how poorly valued his company was. As the stock continued testing new lows, it finally rebounded when rumors surfaced that multiple private equity companies were making a bid for the company. When the deal finally closed, it was disclosed that Blue Prism would be acquired by Vista Equity Partners and combined with another one of their acquisitions, TIBCO. That’s the sort of match-making that only a private equity firm could manage to do.
Another stock that’s supposedly being scrutinized by private equity investors is Alteryx. These are only rumors, but they make sense. Alteryx is a beaten-down stock that has too many chefs in the kitchen. The company’s new Chief Revenue Officer made a change that pummeled the stock, but was the smart thing to do in the long run. That’s the sort of thing a private equity firm might do to add value without having to worry about what shareholders think. Taking a company private allows you to make fundamental changes to it more quickly. But it doesn’t always work out as planned.
Informatica Corporation Rises Again
Any information technology worker who was employed at the turn of the century would probably have heard of Informatica’s data management tools. Anyone who used Informatica (INFA) around that time and heard the name mentioned today would likely react with a “oh, they’re still around?” Yes, they’re still around. And they just started trading on the NYSE.
Informatica used to be a publicly traded company until August 6, 2015, when they were acquired by private equity firm Permira and Canada Pension Plan in a deal that saw Microsoft and Salesforce Ventures join in as investors. Informatica was acquired at a market cap of $5.23 billion, and today they sport a market cap of $8.12 billion. That’s a return of about +55.3%. Simply buying an index that tracks the top 100 companies in the Nasdaq – the Invesco QQQ Trust (QQQ) – would have returned +270% over the same time frame, an exceptional return for holding a boring old index for just over six years. It’s fair to say that the return on investment these private equity investors realized for Informatica wasn’t all that great.
It’s also fair to say that the value Permira expected to extract from Informatica post acquisition wasn’t as great as they expected. Looking at the Informatica S-1 filing we can quickly imply at least part of their strategy.
Flipping Publicly Trading Companies
The term “flipping” is used in the United States to describe purchasing an asset with the intent to quickly sell it for a profit. House flipping was all the rage in the U.S. with television shows on the subject and plenty of “we’ll teach you how to flip houses successfully” seminars. Now, think about this.
If you purchased a house from someone for $500,000, and learned afterwards that it was bought for $400,000 three months earlier, how would that make you feel? Not so good, because it implies that you overpaid. The same concept holds true for companies. What Permira et al did was buy Informatica and flip it, hoping to realize a large return by doing so. After purchasing the company, they figured out where all the bodies were buried, and things didn’t work out as planned.
Prior to Informatic being acquired, we knew that 2014 revenues were $1.05 billion, up 11 percent from $948.2 million in 2013. While we’re not provided all the data points, here’s how their revenues progressed (grey bars reflect estimated values).
After being acquired, Informatica’s revenues growth plummeted from the double digits to a compound annual growth rate CAGR of just +3.36%.
Up until now, we haven’t said a word about what Informatica does except to make a vague reference about “data management.” We also implied that their platform has been around for a while. While companies like Snowflake, Databricks, and Fivetran are realizing tremendous growth in providing leading-edge big data products, Informatica appears to be maintaining a legacy product that hasn’t kept up with the times. So, what did Permira manage to accomplish over the past six years? Well, they outright tell us.
In 2015, we set out an ambitious strategy to transform from an on-premise software company to a cloud-based company. We also transformed from a primarily perpetual license and maintenance revenue model to a primarily subscription-based revenue model supported by our new cloud products.Credit: Informatica
In other words, they did what Informatica should have been doing in the first place. The result is charts that look like this:
When what’s actually happening is that they’re just implementing a software-as-a–service (SaaS) business model and getting rid of perpetual licenses. We can see this when looking at their revenue segment breakdown (highlighted below in yellow):
When we look at overall revenue growth, it’s growing at about what you’d expect a company’s typical price increases might be just to keep up with inflation.
The Informatica IPO
There couldn’t be a better time for an initial public offering (IPO) given investors are eager to buy just about anything these days except value. Informatica shares debuted to a lackluster reception, which is hardly a bad thing if you want to own shares of the company. Here’s how Informatica stock stacks up using our simple valuation ratio:
- Market cap / annualized revenues
8,118 / (2 * 676) = 6
And here’s how that number compares to a handful of SaaS stocks from The Nanalyze Tech Stock Catalog (company names link to our research).
|Artificial Intelligence||Sumo Logic||9|
Informatica may come to the market with a decent valuation, but that stock price only reflects the lack of growth on offer.
For any aspiring MBAs out there looking for a group project idea, here’s one. Take a basket of companies taken public by the world’s top private equity firms after being flipped, then examine the returns of that basket against a broader market index over the longest period possible. We’d postulate that the basket underperforms, because private equity firms are experts at flipping – extracting as much value as possible in the shortest time frame possible. Once they see no more upside, that’s about the time to sell the asset (market timing certainly comes into play too). The first takeaway is that we should always be wary of companies that are being flipped.
The second takeaway underscores the importance of only buying tech stocks with traction and strong revenue growth. Even if a stock hits the skids harder than Pete Dougherty on any weekday night, it will always have what technical analysts call “support.” That is, the stock of a quality business can only fall so far before a consortium of institutional investors steps in and buys value. (That rule doesn’t seem to apply to TeamViewer, something we’ll talk about in a coming piece.) You can bet that every large private equity firm has every quality company on their radar, and that helps explain why there are oftentimes multiple private equity bidders for the same asset. We always want to buy quality companies because private equity firms will provide some support for the share price if things go pear-shaped.
It doesn’t really matter what the Informatica S-1 says because this isn’t a stock we’re interested in. Permira has decided to take this company public at arguably the best possible time in their view, so who would want to pick up what they’re putting down?
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