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Pivotal Software Could Be Solid Buy

Published 04/23/2018, 10:33 PM
Updated 07/09/2023, 06:31 AM

Say your company is about cloud software these days, and it seems like investors will rush out to stuff wads of money in your pockets. Unfortunately, cloud software company Pivotal Software (NYSE:PVTL) showed in its Friday IPO that that is not always the case. Even though it raised $555 million and has a valuation of nearly $4 billion after its IPO according to Forbes, it did not see a major boost on the first day of trading and saw its value fall to near its initial levels. Pivotal did do better on Monday as the company’s shares rose in the morning before finishing at $17.26, but it still is not a terrific start.

Given how other tech companies, such as Zuora and Dropbox, had great success in their public debuts, Pivotal’s lack of initial success could be construed as a reason to stay away. But as Barron’s points out, the mediocre showing was likely due to the bad luck of debuting on a day when tech stocks took a hit, rather than to fears about the company. And at this lower price point, Pivotal could in fact be an opportunity to buy low.

There are some reasons that investors may want to stay away from Pivotal such as its strong relationship with Dell and its lack of profitability. But there is a lot to like about the direction this company is taking, and investors should definitely hop on board if it falls to its IPO price level.

Heading in the Right Direction

As noted above, Pivotal Software is yet another cloud software company. Its unique approach is that its cloud software, Pivotal Cloud Foundry, is used to help other companies develop their own cloud software. This makes it easier for businesses to move away from legacy technologies and create something unique that is tailored for them. Given the increasing importance of cloud technology and personalization in modern business environments, there is no doubt that this is a company with potential.

As a result, Pivotal has seen its financial numbers improve over the past three years. According to its SEC report, total revenue increased from $280 million in the fiscal year ending January 29, 2016, to $509 million two years later. Furthermore, most of the revenue increase came from Pivotal’s cloud software subscription as opposed to the professional services and consulting fees which made up the majority of Pivotal’s revenue in 2016 and 2017. Given that the software subscription boasts much higher margins, this is excellent news.

Pivotal is unprofitable and it repeats the standard line of how it may never be profitable. But net losses are decreasing, as losses per share improved from -$4.42 to -$2.38. Pivotal also intends to use the IPO proceedings to fund further marketing and research expenses, which shows that debt is at a manageable level.

The Dell Relationship

Pivotal Software’s financial numbers are acceptable, the company is growing, and it is an important and growing field. But what has investors worried is its relationship with the lately struggling Dell.

Pivotal was acquired by EMC in 2012, which in turn was acquired by Dell in 2016 shortly before it went private. Even after going public, Pivotal states that Dell Technologies will own “70.1% of our total outstanding shares of common stock and approximately 95.9% of the combined voting power of both classes of our outstanding common stock immediately after this offering,” and will thus be able to control all matters requiring approval by stockholders.

Pivotal did stress that the funds raised by this IPO will not be going to Dell, which has been struggling with high debt and fast checks since merging with EMC. But there is no guarantee that Dell may not try to raise funds at Pivotal’s expense at some point in the future, especially since the two companies could be competitors in certain sectors. Pivotal also notes that it faces significant competition from legacy software companies such as IBM and Oracle, as well as public cloud offerings from Google and Amazon.

However, investors should remember that Pivotal’s relationship with Dell carries certain benefits. Pivotal itself states that together with Dell it can help businesses adapt a multi-cloud strategy with a platform to innovate and build cloud software. Pivotal may not be able to count on Dell for support, but it will probably not be dragged down by Dell and is an attractive investment in its own right.

Plenty of Potential

Investors may consider holding off on Pivotal until we get a clearer picture of the share price. Yet at its current price, Pivotal Software is a $4 billion business in a thriving and important field, has decent financial numbers, and is tied with a technology giant which offers some potential upsides. While there is nothing wrong in displaying some caution, investors should consider this stock at its current value, and all the more so if it falls closer to the IPO price.

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