DataWatch is Cheap at $28

This is the second segment of a two-part article about DataWatch. Click here to view Part 1, titled The Best Big Data Stock to Buy.
The bid data industry is growing rapidly, and the potential for a revamped DataWatch (NASDAQ: DWCH)is considerable. Now let’s talk about why DataWatch makes sense as an investment at $28 per share.
First of all, DataWatch is trading at just 9 times 2012 sales (including revenues from Panopticon). This is a 66% discount to the valuations of its peers. And Datawatch appears to be on the verge of profitability – something that is far off for its competitors.
The biggest reason for the DataWatch discount is the company’s growth. Consistent and rapid growth is the last piece of the DataWatch story to fall in place. Revenue grew 9% year over year last quarter, accelerating from 4% in the prior period. With the addition of Panopticon this number will increase dramatically for at least the next three to four quarters.
So what’s the future look like for DataWatch?
Last year, Panopticon grew revenue 112% to $5 million. I assume the growth rate will slow to 75% in 2013, and 50% in 2014 (these are conservative given the opportunity to cross-sell these products to DataWatch customers). That means revenues could grow to $8.8 million in 2013 and $13.1 million in 2014.
Meanwhile, the core DataWatch business should generate revenues of $32 million.  Adding in the Panopticon revenues, we arrive at total company revenues of $41 million in 2013.
Let’s assume the current price-to-sales multiple stays intact at 9 and DataWatch is worth $370 million.  That translates into a share price of $43 or about 50% more than the recent share price.
But if DataWatch generates $41 million in 2013 revenue, it would represent annual growth of approximately 41%. That’s right on par with Splunk’s growth profile. And remember that investors are paying 30 times sales for Splunk. A similar valuation on DataWatch’s shares would value the company closer to $1 billion or as high as $120 per share.
When rapid revenue growth is reported, the last piece of DataWatch’s two-year transformation will fall into place.
The fact is that investors are valuing competing “big data” companies at a premium valuation to DataWatch.  After a successful integration of Panopticon’s products, DataWatch’s financials and stock price will have a long way to climb to the level of industry leaders like Splunk and Tableau.
To read Part 1 of this article, click here: The Best Big Data Stock to Buy
Galileo Russell is a 20-year-old entrepreneur living in New York City. He is currently managing a long/short equity fund, with a primary focus on consumer-tech and cloud computing. Galileo has been writing for Seeking Alpha since 2011, publishing over 50 articles, including three  exclusive NASDAQ CEO interviews. Galileo is a junior at New York University’s Stern School of Business, and is planning to major in Finance.

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