How to Profit from the Salesforce-Tableau Software Merger

Data is king in today’s technology-driven world. And that’s why Salesforce.com (CRM) just bought data visualization software company Tableau Software (DATA) for $15.75 billion in an all-stock deal. The Salesforce-Tableau Software merger could have lasting ramifications for the market and your portfolio.

For Tableau Software, the Salesforce takeover is an instant hit. DATA stock jumped 33% on Monday on news of the deal, gapping up from 125 to a new all-time high of 167.

The Salesforce-Tableau Software merger prompted a 33% gap up in DATA stock.We’ve written extensively about why you need at least a couple takeover targets in your portfolio. But the greatest profit potential in takeover targets is in owning them before they’re bought out.

You could buy DATA stock now. But it could take another year (or more) for it to advance another 33%.

As for Salesforce.com, CRM stock is down since the deal was announced, which is typical for shares of a company that just spent billions in an acquisition—particularly one that paid almost a 50% premium for a company with a market cap of just $10.8 billion prior to the deal.

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Long term, however, Salesforce stock is the more likely winner of this merger. For one, it gives the company—which specializes in customer relationship management (CRM) software—a foothold in the faster-growing business intelligence market, which is likely why Salesforce was willing to pay such a premium. It also conservatively adds more than a billion dollars to Salesforce’s revenue stream; Tableau Software has done $1.19 billion in sales over the last 12 months, and is projected to pull in $1.37 billion in its current fiscal year.

For perspective, Salesforce did $14 billion in sales over the last 12 months. Before the deal, analysts were projecting 21% sales growth for Salesforce this year and another 19.8% next year. The Tableau Software revenue would theoretically bump up those growth numbers to +30% for both years.

On the heels of Google’s (GOOG) $2.6 billion buyout of private data analytics startup Looker last week, it’s clear that the big boys are trying to gobble up smaller companies that can give them an advantage in the data and business intelligence game. And that means you should be on the hunt for small- and mid-cap stocks that are riding the data growth to double- and triple-digit sales gains. Those are the companies that are likely to attract the next buyer.

The biggest (or at least quickest) profit opportunity related to the Salesforce-Tableau Software merger probably evaporated the second the deal was announced. But if you don’t already own CRM stock, it just became more attractive, especially since shares are down 7.5% in the two trading days since the deal went public, yet still holding above five-month support at 145.

You could buy CRM here and hold it for the next couple years. Or you could hold out for the next potential takeover target in the data space. Fortunately, Tyler Laundon, chief analyst of our Cabot Small-Cap Confidential advisory, knows a thing or two about data and software stocks, particularly small ones. And he lists Alteryx (AYX), MongoDB (MDB) and Open Text (OTX) as potential future targets.

Maybe they won’t be bought out this year or even next year. But all three stocks are growing so fast (average year-to-date gains: 62%!) that you can afford to wait until a bigger fish gobbles them up.

Chris Preston

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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