Why We Believe Qlik’s Stock Is Worth $40
Qlik Technologies (NASDAQ:QLIK) has been performing exceptionally well in the last few quarters, and the stock is up close to 30% year to date. We believe the company is well on track to acquire 60,000 customers by 2022, benefiting immensely from the increase in demand for data discovery based Business Intelligence (BI) software. Qlik’s “Land and Expand” strategy has been very successful thus far, and will continue to help the company grow its licensing revenues in the years to come. Maintenance revenue has grown in proportion to software licensing revenue due to a strong maintenance renewal rate of around 90%, and we believe that maintenance revenue will continue to increase throughout our forecast period. Consequently, we are revising our price estimate for Qlik to $40 based on the following projections.
See our complete analysis for Qlik
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Qlik’s customer base has grown significantly in the past few years, jumping from 13,200 customers in 2009 to approximately 36,000 customers as of June 30, 2015. [1] Qlik has benefited immensely from the increase in demand for data discovery based Business Intelligence (BI) software, and we believe the company is well on track to acquire 60,000 customers by 2022. Qlik’s growth is also boosted by the company’s continuous focus on product innovation and a strong sales and marketing push. Additionally, Qlik has consistently demonstrated faster-than-industry growth in the past. While the Business Intelligence and Analytics industry grew at a steady pace of around 8% to 9% in the last few years, Qlik’s revenue has increased at a CAGR of over 20% in the last three years. [1] According to Gartner, the Business intelligence and analytics software market is expected to grow at a CAGR of 8.7% through 2018 [2] and this strong growth projection for the industry as a whole provides us the basis for the forecast of Qlik’s number of customers.
Maintenance as % of Licensing Revenue Will Continue To Grow
Maintenance services are a major source of revenue for Qlik and contribute close to 44% of the stock’s value, according to our estimates. [1] When customers initially purchase Qlik products, one year of maintenance agreements is typically included in the purchase price. The maintenance and support agreements from second year onward are sold on a term basis and their renewal is optional for customers. Qlik has witnessed a strong maintenance renewal rate of around 90% [1] for the past three years, which reflects the value that the customers realize from using its products, and also the value they see in having an active maintenance agreement. Qlik’s licensing revenue is based on perpetual licensing, whereas maintenance revenue is recurring and boasts of a strong renewal rate. This has helped maintenance revenue grow in proportion to software licensing revenue, and it currently stands at around 68% compared to 44% three years ago. We believe that maintenance agreement revenue will continue to increase and will reach the levels of software licensing revenue by the end of our forecast period.
Lower Weighted Average Cost Of Capital
We have revised our discount rate (or weighted average cost of capital) downwards for valuing Qlik’s stock. This is the rate at which we discount the company’s future cash flows, and is the weighted average of its after-tax cost of debt and cost of equity. This figure is a measure of a company’s risk. Qlik justifies this revision as the stock’s beta has come down in the past year. Beta is a measure of company’s stock volatility relative to the broader market. Qlik’s correlation to the broader market has improved, which means that the risk of fluctuations in its stock price has come down. The company has also been able to stabilize its business and increase its revenues without taking on any long-term debt. This further reduces the risk in the company and warrants the revision.
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