No Recipe for Success: Low Margins in a Competitive Industry

This stock’s valuation has not adjusted to reflect new competitive pressures or the rapidly deteriorating fundamentals.

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Acquiring Revenue Can Quickly Destroy Shareholder Value

This firm moved to bolster its position within its market by acquiring a competitor in 2016, but it paid too high a price. The expected synergies from the deal have not come to fruition and the profitability of the combined firm has fallen instead of rising.

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Failure to Adapt Dooms This Stock

This firm’s late transition to the cloud based software market has left it with falling profits, lagging margins, and a significantly overvalued stock.

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Danger Zone: Verint Systems (VRNT)

This firm has seen seen margins contract as early success brought more competition. To try and offset competitors taking market share, the firm made numerous shareholder value-destroying acquisitions. Now the stock is pricing in aggressively optimistic improvements in revenue growth and profit margins.

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Danger Zone: Tableau Software (DATA)

This stock is on the upswing and is up 23% year-to-date, while the S&P is up just 6%. The fundamentals of the business don’t justify this price move. In fact, negative margins, strong competition, and the overvalued stock price land Tableau Software (DATA) in the Danger Zone this week.

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Danger Zone: Palo Alto Networks (PANW)

The fundamentals of this business make it hard to imagine a scenario where this firm can meet the expectations baked into its lofty valuation. For these reasons and more, Palo Alto Networks is in the Danger Zone this week.

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Danger Zone: Bottomline Technologies (EPAY)

Red flags appear when a firm sacrifices profitability to join the cloud and transitions to a business model with negative margins. Add in significant competition and an overvalued stock price and investors should be running for the hills.

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Danger Zone: SPS Commerce (SPSC)

This week’s Danger Zone pick is a company that touts 61 consecutive quarters of revenue growth despite five years of shareholder value destruction. Increased competition, misleading non-GAAP metrics, and an overly optimistic valuation land SPS Commerce (SPSC) in the Danger Zone.

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Danger Zone: FireEye Inc. (FEYE)

Many investors saw the recent price decline as a time to buy, and the stock is up 30% since mid-May. With shares now greatly overvalued plus large profit losses and strong competition, FireEye (FEYE) is this week’s Danger Zone pick.

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Danger Zone: Imperva Inc. (IMPV)

This week’s Danger Zone pick has since rebounded and might have investors thinking now is the time to buy. Unfortunately, the fundamentals of this company reveal a different story. Growing losses, misleading non-GAAP metrics, and significant competition land Imperva Inc. (IMPV) in the Danger Zone this week.

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Danger Zone: Cornerstone OnDemand (CSOD)

Companies with long histories of profit losses often attempt to sell investors on their plans to “reach scale.” But, what happens when a company reaches scale and profits remain elusive? Profitless since going public, Cornerstone OnDemand (CSOD) lands in the Danger Zone this week.

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Open Letter to Larry Ellison: How To Boost Oracle’s Value By $65 Billion

Thesis: Management can boost the market value of ORCL in the amounts provided by aligning the firm’s strategy and performance compensation with real cash flows or what we call return on invested capital.

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Danger Zone: Pure Storage (PSTG)

This week’s Danger Zone hones in on another IPO from 2015 that may have been one of the last to capitalize on the easy money in the market. Post IPO, we believe it won’t take long for investors to realize this company is bleeding cash, has no profits, and faces stiff competition moving forward.

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Danger Zone: Qlik Technologies (QLIK)

Despite deteriorating margins, lack of competitive advantage, and a sky-high valuation, Qlik Technologies (QLIK: $31/share) is up nearly 33% over the past two years and finds itself in the Danger Zone this week.

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Danger Zone: ServiceNow (NOW)

Just when we think the market is becoming more rational and beginning to focus on fundamentals again we find a stock that proves that idea wrong. Once again, we’ve identified a business that fails to generate profits, uses “adjusted” metrics as “better representations of business”, and who’s stock price is up over 200% since late 2012. ServiceNow (NOW) is in the Danger Zone this week.

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4Q15 Style Ratings for ETFs & Mutual Funds

At the beginning of the fourth quarter of 2015, only the Large Cap Value and Large Cap Blend styles earn an Attractive-or-better rating.

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Danger Zone: Marketo (MKTO)

This week we’ve identified another highflying cloud company that exhibits many of the problematic traits we saw in DWRE and SPLK. Revenue growth can only support a stock for so long and this week’s Danger Zone stock, Marketo (MKTO) has plenty of room to fall.

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The Best and Worst of the All Cap Growth Style

The All Cap Growth style ranks sixth out of the 12 fund styles as detailed in our 3Q15 Style Ratings for ETFs and Mutual Funds report. It gets our Neutral rating

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Ignore the Hype: Splunk Remains Overvalued

In early 2012, Splunk Inc. burst onto the scene with one of the biggest IPOs of the year. Since then, the stock price has ridden the hype and is up more than 320%. This price increase should raise serious concerns for astute investors.

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High Revenue Growth Masks Problems at Demandware

Demandware IPO’d in 2012 based on plans to create shareholder value by providing e-commerce platforms for retailers and brands worldwide. So far, the plan is not working as the company’s profits have declined. Paradoxically, the stock price has climbed over 140% since its IPO. The stock is dangerously overvalued and earns a place in the Danger Zone this week.

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