Commvault Systems has been treading water for the past six months, recording a small return of 3% while holding steady at $176.80. However, the stock is beating the S&P 500’s 2.5% decline during that period.
Is there a buying opportunity in Commvault Systems, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Commvault Systems Not Exciting?
Despite the relative momentum, we're swiping left on Commvault Systems for now. Here are two reasons why CVLT doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Commvault Systems’s sales grew at a sluggish 9% compounded annual growth rate over the last three years. This fell short of our benchmark for the software sector. 
2. Shrinking Operating Margin
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Looking at the trend in its profitability, Commvault Systems’s operating margin decreased by 1.6 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 7.4%.
Final Judgment
Commvault Systems’s business quality ultimately falls short of our standards. Following its recent outperformance amid a softer market environment, the stock trades at 7× forward price-to-sales (or $176.80 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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