When CommVault Systems (Nasdaq: CVLT) was founded roughly 25 years ago, corporations were only beginning to grasp just how hard it would become to manage far-flung internal networks. CommVault initially had modest hopes of delivering a few key software tools, on a platform known as Simpana, that could help IT managers archive, search and restore key corporate databases. 

#-ad_banner-#We now know that such networks have become remarkably large and complex as the era of cloud computing takes root. And such complexity has paid off for CommVault in the form of rising demand. 

Annual sales surpassed $100 million in fiscal 2006, which was the year the company went public, and moved above $300 million by fiscal 2011. With CommVault’s Simpana now in its 10th generation, sales are expected to cross the $600 million threshold in the current fiscal year. In response to that kind of growth, shares zoomed from under $20 in 2010 to an all-time high of $90 in late 2013.

The task of network management would seem to be an easy fit for the major IT firms such as Dell, Hewlett-Packard (NYSE: HPQ) or NetApp (Nasdaq: NTAP). But Gartner found that some of these jack-of-all-trades tech firms offer mediocre IT management tools as part of their broader hardware/software bundles. Gartner surveyed more than 1,000 IT buyers in 2013 and found that CommVault stood out as an industry leader.

“CommVault continues to be a mind-share leader in the industry, marketing effectively and creating a perception of being a much larger vendor than it is,” noted Gartner’s analysts. 

But as is the case with many young tech firms, CommVault is now experiencing growing pains. Sales of $157 million in its most recent quarter trailed consensus forecasts by around 2%, in part due to a shortage of qualified sales engineers. 

Growth investors decided to flee, and quite suddenly, with shares plummeting more than 30% after the revenue miss. CVLT is back in the bargain bin, trading below $50, which opens up a great window of opportunity for value investors.

Management is making accelerated investments in the salesforce, which means that per-share profits will likely be stuck at around $2 this year.

Lake Street Capital’s Eric Martinuzzi writes: “CommVault has been frustrated by its own lack of hiring and expects to fix the issue in (its 2015 fiscal year). The company has hired some HR ninjas who are specialists in onboarding IT sales and sales engineer personnel. Margins in (the first half of fiscal 2015) are expected to be negatively impacted.”

CommVault’s internal investments are so significant that it is surprising that per-share profits will be flat. Investing in the salesforce is crucial for the company’s next phase of growth. In the past, it derived a solid portion of sales from large tech firms that acted as a reseller. But as CommVault grows larger, it is morphing into more of a rival than a partner to the big IT vendors.

Dell, for example, accounted for more than 15% of sales in 2014, but is expected to rely more on an in-house solution in coming quarters. Yet, analysts at JMP Securities are confident about the company’s future, saying: “1) the Dell headwind is largely behind it; 2) the company continues to take market share from legacy incumbents; and 3) the spending environment for backup and recovery software remains healthy overall.” They see CVLT rebounding to $65.

The investments in the salesforce are expected to help generate stronger sales in the second half of fiscal 2015, according to CEO Robert Hammer, though he cautions that the first half of the fiscal year won’t show the progress that investors want to see.

But Hammer, along with analysts who follow the company, expects stronger results in the December and March 2015 quarters. That should set the stage for a return to 15% EPS growth in the fiscal year that begins next April, according to consensus forecasts.

Looking at the subpar results in CommVault’s most recent quarter, analysts at BMO noted that CommVault has often wrestled with “insufficient sales coverage.” Yet they add that sales outside the U.S., especially in Europe, are holding up well: “Cloud continues to show impressive growth, and overall we agree with the company that the products are strong and the opportunity is there.”

BMO’s analysts added that “a number of large deals that slipped have closed or are likely to close soon, which lends support to management’s assertion that consensus thinking for 15% top-line growth for (fiscal 2015) is reasonable.” They see shares rebounding to $80, representing 60% upside. 

CommVault is a solidly positioned growth company experiencing growing pains. Such hiccups are inevitable — but when they occur and send myopic investors fleeing, far-sighted investors have a chance to profit. 

Shares might stay rangebound for the next month or two, at least until it becomes clear that the company’s internal investments in the salesforce are starting to take root. But by later this year, this stock should be working its way toward the $70 mark.

Action to Take –>
— Buy CVLT at the market price
— Set stop-loss at $43
— Set initial price target at $70 for a potential 41% gain in six months

This article was originally published at ProfitableTrading.com: 
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