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
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
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
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
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 2019 consensus revenue estimate of $452 million (estimated growth of 22%) is 5.1.
Another possible takeover target is Alteryx (AYX
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 ($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 2019 (Jan.) forward revenue estimate.
Robb DeFrancesco is editor of Tech-Stock Prospector.
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