Qlik Technologies, Inc. (NASDAQ:QLIK)

CAPS Rating: 3 out of 5


Player Avatar aosgood (< 20) Submitted: 8/18/2011 6:59:51 PM : Outperform Start Price: $24.96 QLIK Score: -57.92

Qlik Technologies is a Swedish-based business intelligience (BI) company. Its main product is Qlik View, a streamlined BI program that uses in-memory processing, which does not require the expensive infrastructure the online analytical processing (OLAP) based programs used by the majority of the BI industry. Qlik View is both cheaper and easier to use for potential customers than its OLAP competitors, and this ease-of-use widens the audience for the BI industry as a whole. Also, Qlik View has recently been modified for the mobile interface and is available for tablets around the world.

My biggest fear, the media's biggest fear, and I imagine many of its potential investor's fear, is that QLIK may be horrifyingly overpriced. Qlik is trading at a outrageous 278.10 to 809.21 P/E depending on where you look (278.1 on the Fool and Seeking Alpha, 516.6 on Yahoo Finance, and 809.21 on Google Finance) Using the ttm earnings reports on the Fool's own site I got an EPS (ttm) of 3.25 cents a share and a P/E of 794.8. Frankly either way I find this stat to be a little overwhelming to say the least, and I'm really not sure where the 278.1 came from. The recent market pullback has made the pricing slightly more attractive, although I hesitate to use the words attractive and a triple digit P/E ratio in the same paragraph. Things need to be put into perspective if we are to understand this sky-high valuation.

First, and foremost, Qlik Tech is a relatively small company competing against some of the biggest names in tech: IBM, Microsoft, and Oracle, and other smaller companies with similar ideas: MicroStrategy and Datawatch. While the BI industry is burgeoning, it is important for QLIK to gobble up as much market share as it can as fast as it can to establish a dominant position in mobile and in-memory processing BI. Therefore, management is doing exactly what it should be doing: aggressively upping sales spending and hiring hundreds of new sales employees. As a result, profit margins have fallen, the P/E has shot through the roof, the company has increased its 2011 revenue forecasts three times, revenue for the most recent quarter jumped 45% from last year (before they were spending so much on sales), and the size of the customer base has increased 40%.

Second, I have heard it that the company likes to report their big earnings in Q4 and keep the other three quarters more or less break even. Either way, earnings last quarter went above and beyond analyst forecasts; revenue growth in particular was outstanding, up 45% from last year.

Third, Qlik has created a loyal customer base by continuous devotion to providing its customers the best possible service at the best possible value with Qlik View. Mitsubishi's Electric Cooling and Heating Systems said that its investment in Qlik View paid for itself in two months, and Qlik Tech claims an average ROI of 186% for the product. At 21,000 customers and growing, QLIK's heavy sales spending is paying off huge. In addition, each new and old customer Qlik has is one less for its competitors; with each customer the company is building a growing moat around its services.

Also important is the fact that the company has no debt, as of the start of Q2 2011 Qlik had paid off the last of its debt. Therefore, low earnings are not cause to worry that Qlik won't be able to pay off its creditors and go bankrupt.

In conclusion, Qlik Technologies has a great product that revolutionizes an old but still growing industry, and its growth potential justifies a deceptively high P/E caused by all the right management activities and a cyclical earnings schedule. Once the BI market has been saturated and Qlik Tech has grown all it can grow, then the company can lower it sales spending, up its profit margin, and trade at a much lower P/E ratio. However, the current high valuation doesn't show Qlik View isn't bringing in enough money, the company is in trouble, or its a bad product that customers hate. In fact, the exact opposite is true in each of those cases. Given the above, I would rate QLIK a strong buy, especially at recent prices with the market so topsy turvy.

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