The Cloud Rules Again This Year

06/04/2013 1:00 pm EST


Rob DeFrancesco

Founder, Tech-Stock Prospector

UPDATE from Rob DeFrancesco, June 4, 1pm EDT:

Salesforce (CRM) this morning announced its $2.5 billion purchase of ExactTarget (ET). This was virtually a given after Oracle (ORCL) in December acquired Eloqua, which had been a key Salesforce partner. I talked about the possibility of ET getting bought out in the interview below.

The interesting thing is, on the call this morning Salesforce CEO Marc Benioff said the ET deal was a "very competitive process," which makes me think SAP (SAP) was in the mix. CRM did have to pay a 53% premium, so there was definitely a competitive bidder (or two) involved.

The next possible buyout candidates in this space (maybe on SAP's list) are Marketo (MKTO) and Responsys (MKTG). Of the two, Responsys is much cheaper. Marketo was said to be on CRM's shopping list before its IPO last month, and now faces a much stronger competitor in the combined CRM/ET.

Cloud computing remains the big story in the tech sector and there are still a lot companies entering the sector...just be particular when you're buying, advises Rob DeFrancesco of Tech-Stock Prospector.

Gregg Early: I’m here with Rob DeFrancesco, editor and publisher of Tech-Stock Prospector. Rob, I thought that it would be a good time to catch up on the cloud, since that still seems to be the headliner in the tech space. And also, what are you looking at for 2013? Are there any stocks out there that look particularly interesting?

Rob DeFrancesco: Yes, I think the cloud stocks had a great year last year, and I think that we’ll probably see another good performance this year.

Just running through some of the big ones, (CRM) was up 65% last year and NetSuite (N) was up about the same. Cornerstone OnDemand (CSOD), a small cloud company, was up about 62%, and so I think we’ll probably see some good gains this year.

I also think we’ll probably see some more acquisitions in the cloud space. We just had Oracle announcing they’re buying Eloqua (ELOQ). They do cloud-based interactive marketing.

And there’s a company called ExactTarget (ET). It may be another stock that might be taking over in that space. It’s trading cheaper than Eloqua, and they do more business to consumer marketing, but they recently purchased a company that will make them more competitive against Eloqua. So that’s a cloud name.

I also like Cornerstone OnDemand, which is in cloud-based human capital management, basically talent management, recruiting, learning.

Another small-cap cloud name is SPS Commerce (SPSC). They do supply chain management solutions, and they’re a very small company, but putting up some pretty good revenue growth last year. They’re supposedly coming with growth about 32% and about 27% for 2013.

Suppliers, retailers, distributors use SPS Commerce’s software to build trading partner relationships and manage order flows in the retail supply chain. So that’s a small-cap name to watch in the cloud space.

Then just some other names that I like...there’s a company called Imperva (IMPV), and they do data center security solutions. We hear a lot about networking securities, but Imperva is in the data center space. They mainly compete against IBM (IBM) and F5 Networks (FFIV). The top line is growing about 30%. The stock was down actually 7% last year. So they might be doing some catching up this year.

This was a 2011 IPO. It’s done that pretty well, came out at $18 a share and opened for trading at $23. It’s now in the low $30s. Revenue for this year is expected to be up about 25%, and Oppenheimer recently said it was one of their favorite software infrastructure names for 2013, because I think it’s well positioned.

Then, another small company is Infoblox (BLOX). They provide automated network control appliances that basically are for next generation data centers. So it allows, the dynamic of networks allow on-demand connections and configurations of devices, so it accelerates the delivery of virtualization and cloud computing.

Infoblox was a 2012 IPO and went public at $16, traded up to $24, and then it dropped sharply. They had a strong third quarter, so the stock bounced back; but it’s still trading just under $20 a share, and revenue I think is supposed to hit around 25% growth, or maybe 23%, 24% growth.

So for me, technology companies, that they’re growing...if the top line is growing faster than 15%, I think that’s pretty standard. If they’re doing anything much higher than that, I think it’s a promising name to watch.

Also, we’ve had a big drop just today in VMware (VMW), which does virtualization software, and the management team is pretty conservative looking into 2013. I think it’s a good way to play them, as the majority owned by EMC (EMC).

So EMC gives you less volatility but you get VMware, and also you get access to the basic storage market. EMC is offering a lot more solutions that are flash-based, which is a growth driver for them. EMC gives you exposure to VMware and also the general storage market.

I like EMC in the low $20s. I think it’s not a super-fast grower, but it’s a more conservative tech stock and it gives you some exposure to growth.

Gregg Early: Well, it sounds like the cloud continues to grow. It doesn’t seem like it’s gotten old enough yet where there’s a great deal of consolidation or the bigger players have snapped up. There seems to be a thousand flowers flourishing there. So do you see this as the trend for the next couple of years or so?

Rob DeFrancesco: Yep. The thing is, there have been some acquisitions there, and the ones that are left, a lot of them are pricey. I mean NetSuite is an expensive company.

There is also Workday (WDAY), which became public last year and has cloud-based financial and HR software. They’re mainly financial, but have been moving more into HR. These are expensive companies. So I don’t see a lot buyers offering them a big premium for these. I think a lot of the names have been grabbed up. So, with the cloud name you can get a pullback in the stock. That’s a good way to play it.

NetSuite is a great company. I think it’s expensive here, around $70 a share; but if for some reason you get a pullback, that would be a good way to play the cloud. I think there will still be acquisitions, but I don’t know. I think a lot of the good names were scooped up in 2012.

Gregg Early: Yeah, so they’re now fully valued. It’s like a lot of markets.

Rob DeFrancesco: Yeah.

Gregg Early: The hard part’s the market where you really have to look at each stock individually to find out if there’s any value there....

Rob DeFrancesco: Right. I mean recently, Goldman Sachs downgraded NetSuite, and there’s another company called Ultimate Software (ULTI), which is cloud-based human capital management, and they downgraded those to neutral on valuation.

They still like Cornerstone OnDemand because of its high top-line growth. So, yeah, I think a lot of investors they like the idea of the cloud, but they don’t want to pay out for these names, these valuations.

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