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Pivotal could vault IPO price

Article By: ,  Financial Analyst
April 18, 2018 5:07 PM

Pivotal could vault IPO price

Small IPO with big potential

Multibillion dollar Spotify and Dropbox IPOs have been in the spotlight in recent weeks, but a smaller tech firm coming to market this week also has the ingredients for a spectacular debut. In ‘big tech’ terms, Pivotal Software is a minnow. Having raised around $3.7bn from investors including Microsoft, Ford and General Electric the San Francisco-based firm targets no more than $592m at IPO for a total valuation around $4.3bn. But Pivotal is interesting for reasons other than market value. For one thing, majority ownership by Dell Technologies, the data storage provider-to-PC maker, adds intrigue.

Open Source and SaaS

Just as important, Pivotal has carved out a niche in the hot software as a service (SaaS) sphere, with the added spice of open source. Hardly any of its rivals share their code. In theory, the advantage of open source solutions means Pivotal platforms for ‘big data’, consumer services, Android apps and more, can meet market trends more quickly, and individual clients can customise its software more easily.

The rise of Cloud

The group is also floating into a galloping cloud sphere dominated by Amazon, Google and Microsoft. Salesforce scooped up a similar outfit last month for a sum equivalent to 16 times revenues. As well, Pivotal applications, which can work on a variety of different hosts, are attractive to giant multinationals seeking ways to reduce reliance on cloud leaders. It’s one reason why Pivotal revenues rose 22% last year.

Why so cheap?

Yet Pivotal is going for the equivalent of just 7 times revenues, a big discount to the sector. That’s despite revenues rising four times faster than costs in 2016-2017 after annual losses narrowed to $164m from $233m. One explanation is the group’s minus-25% operating margin. Pivotal says it needs a 20% operating margin for overall profitability. Another reason is that Dell will retain almost 100% of votes by floating a new, ‘lower’ class of stock.

Pivot time

Still, the recent history of big and not-so-big tech shows investors can get over a lack of votes fairly quickly if growth is brisk. (See Google, Facebook, Snap and others). Plus, the optics of a ‘start-up’ backed by deep-pocketed, albeit heavily indebted Dell and affiliates are helpful. Investors have recently shown both huge appetite and bouts of risk aversion for zingy new techs. Pivotal will hinge on which side of its $14-$16-a-share range wins out at Thursday’s IPO, and the start of public trading on Friday.


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