Sell-Side Convinced Of Pivotal Software's Fundamentals In Wake Of Q3 Beat

Pivotal Software Inc PVTL reported 30-percent year-over-year revenue growth and a narrower-than-expected loss for its fiscal third quarter on Tuesday.

The Analysts

Wedbush analyst Daniel Ives maintained an Outperform rating and $25 price target for Pivotal shares.

Credit Suisse analyst Brad Zelnick reiterated an Outperform rating and $25 price target.

Bank of America Merrill Lynch's Nikolay Beliov maintained a Neutral rating and reduced the price target from $25 to $22.

Wedbush: Clear Pathway To Profitability

Pivotal bounced back from a July-quarter billings miss with a Q3 beat thanks to above-consensus subscription revenue and billings, Ives said in a Wednesday note. Q3 saw growth in key areas, with strong customer expansion rates and over 50-percent subscription growth, he said.

The results confirm that the company has scope for further expanding its customer base, capitalizing on the shift to the private cloud and public workloads within enterprises, the analyst said. 

"We continue to believe PVTL is uniquely positioned, as applications are becoming the face of the business, digital channels are omnipresent, and application developers are dictating infrastructure technology decisions."

Pivotal has a clear path to profitability in the coming years, Ives said. The analyst models 35-40-percent subscription growth, on average, over the next three years.

This is feasible due to the replacement of legacy Oracle Corporation ORCL and IBM IBM middleware and growth in cloud-native spending, according to Wedbush. 

Credit Suisse: Subscription Revenue To Outperform Expectations

Pivotal stands to benefit from unprecedented digital disruption faced by enterprises, and this, coupled with a surge in cloud-native spending, positions the company to report two-year subscription revenue CAGR ahead of Credit Suisse's 36-percent estimate, Zelnick said in a note. 

The company's above-consenus Q4 guidance and revised fiscal 2019 guidance embed some conservatism given the deceleration in trailing 12-month subscription billings they suggest, the analyst said. 

Credit Suisse increased its revenue estimate for fiscal 2019 from $650 million to $658 million and its 2020 revenue estimate from $792 million to $821 million.

BofA: A Great Story, But Valuation Close To Fair

Pivotal's subscription revenue mix is increasing over time, while services revenue growth remains flat, Beliov said in a note. The fast revenue growth rate is supported by a 150-percent expansion rate and go-to-market leverage with Dell Technologies Inc DVMT and VMware, Inc. VMW, he said. 

Beliov noted an addition of 14 net new customers. Fiscal 2019 guidance came in ahead of BofA's estimates, the analyst said. 

Cash flow from operations is likely to breakeven at around the $800-million revenue point, Beliov said. 

"Pivotal is a great investment story, but current share price is close to fair value, in our view."

The Price Action

Pivotal shares were up 6.29 percent at $18.92 at the time of publication Wednesday.

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