Two important questions to ask before you buy Tableau Software, Inc. (NYSE:DATA) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine Tableau Software’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
What is free cash flow?
Tableau Software’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Tableau Software to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Tableau Software’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Tableau Software’s yield of 0.15% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Tableau Software but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Tableau Software?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Tableau Software’s expected operating cash flows. Over the next two years, Tableau Software’s operating cash flows is expected to grow by a double-digit 98%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Tableau Software’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||US$155m||US$224m||US$306m|
|OCF Growth Year-On-Year||45%||36%|
|OCF Growth From Current Year||98%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Tableau Software as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I suggest you continue to research Tableau Software to get a more holistic view of the company by looking at:
- Valuation: What is DATA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DATA is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Tableau Software’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.