Should Investors Keep Pivotal IPO On Their Radar?

  • Pivotal just received a $253M cash injection and is expected to go public next year.
  • The company has big cross-industry success coupled with impressive growth rates and reasonable valuation.
  • Pivotal is a prominent IPO candidate that investors should keep on their radar.

The software and services company Pivotal made a significant step towards an IPO when it successfully raised $253M in a Series C funding round from prominent strategic investors like Ford Motor (NYSE:F), Microsoft (NSDQ:MSFT), and General Electric (NYSE:GE), as well as additional funding from its previous parent companies EMC (NYSE:EMC) and Vmware (NYSE:VMW). Unlike many other startups in the cloud and datacenter markets that are VC-backed, Pivotal was formed in 2013 after EMC and VMware spun off app development tools, big data analytics, cloud app platforms, and other enterprise software assets into a newly formed company called Pivotal. Pivotal inception included not only spun-off assets from EMC and VMWare but also a $105M cash injection from GE that received a 10% stake in the company.

Pivotal develops software tools that enable companies to build their own cloud and big data capabilities based on open-source software to support company mobility and app requirements. The automotive industry was very interested in Pivotal as the automakers moved toward more tech-savvy cars like autonomous vehicles, electric vehicles, and connected cars. To benefit from the rising demand for cloud capabilities in the auto industry, Pivotal signed strategic partnerships with Volkswagen, Mercedes-Benz, and Ford. Pivotal worked with Ford on developing the company’s new added-value mobility solution FordPass, which helps users with parking, car sharing, remote access to vehicles, and other services. FordPass is part of Ford’s efforts to expand its offering beyond just vehicles and offer added-value services through supplementary technology that at the end will work with the company’s future cars.

Ford invested the lion's share of the total series C funding round with a whopping $182M of the $253M that was injected into Pivotal. Ford moved from being a strategic partner and a customer to being a principal shareholder with a seat on the board. Having Ford heavily invested in Pivotal makes the company more attractive in current times when tech stocks drop in the public markets and startups are devalued in the private markets. The recent cash injection from Ford et al. will enable the company to expand its offering not only into automotive but also into other traditional industries that are currently adopting new technologies at a rapid pace like healthcare, financial services, traveling, etc.

Pivotal top-line figures, as reported in EMC’s financial reports, show an impressive growth of 26% YoY as presented in the chart below. Like most software companies, Pivotal generates revenues from both products and services, but most of the company's revenues are generated by services, which account for 67% of the total revenues and grew at 31% YoY. The recent $2.8B valuation in the series C round reflects a P/S ratio of 9.5 (with $297M TTM revenues) which is at the higher end of the range of the publicly traded pure-play big data vendors.

Pivotal_chart 1_050916

Pivotal's success in the automotive industry is only one example of the company’s successful penetration into traditional industries that enabled world known enterprises like Philips, Humana, Hulu, China Citi Bank, BMW and Southwest, Lockheed Martin, and many others to transform into more tech-savvy companies by using Pivotal tools. Pivotal's success, across different industries, increased the demand for its services as more and more companies wanted to adopt the software tools that could be monetized in the long term. Pivotal's popularity among the biggest global companies makes the company a trendy vendor that many companies choose to help them develop cloud and big data capabilities, which, in the end, fuel the upward trend in Pivotal's sales as shown in the chart above.

Pivotal valuation is currently at par with competition but will probably increase toward the IPO as the company’s popularity rises. With impressive top-line growth, reasonable valuation, deep pocket backers, and unbelievable success across many industries, investors should keep the Pivotal IPO on their radar. Initial estimations assumed that the company will go public in 2016. However, the global weakness in the markets and the recent cash injection will probably push the IPO to 2017. In any scenario, Pivotal is not impacted by the EMC-Dell deal that has been closed in the background.

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