The best corporate managers are always one step ahead. Salesforce is the second coming of Amazon.com...
3 Stocks in the Cloud
03/11/2015 10:00 am EST
Peter Staas explains how Software-as-a-Service—and similar Cloud-based functions—are impacting the technology space; here, the editor of Capitalist Times discusses three intriguing plays in this developing sector.
Steven Halpern: Joining us today is Peter Staas, editor of Capitalist Times. How are you doing today, Peter?
Peter Staas: I’m doing great, Steve. Thanks again for having me.
Steven Halpern: Thanks for joining us. Last summer, you and I spoke in a MoneyShow interview about a developing market known as Software-as-a-Service and you highlighted three stocks that have since returned an average of 20%. Now, before we get your updated view on these stocks, would you remind our listeners about Software-as-a-Service and explain why you find this to be such a promising long-term market?
Peter Staas: Sure. Software-as-a-Service is kind of unique in that there are strong selling points for it and benefits both for the customer and for the software companies themselves, which really makes it an easy sell. Software-as-a-Service, basically, it’s moving applications, and that sort of thing, to the Cloud.
For the customers, it really cuts down on the amount that they need to spend on their server infrastructure and other information technology investments. It’s also highly scalable, so if you add new users, you don’t have to go through the installation process—and also—it’s on a subscription basis.
If the company lays off a bunch of people, they just discontinue the subscription. It’s not like they’ve put all this capital into buying permanent access to a program.
That’s one of the big advantages for the customers, and on the software provider side, you know, with the previous model, they would go through these kind of feast-and-famine cycles, you know, boom and bust cycles, where it was like you’d have a huge influx of revenue where you would roll out a new version of whatever your product was and then sales would trickle down until the next one came out.
With the subscription model, it’s a much more consistent stream of revenue and that transition, you know, Microsoft has made that transition with its Office products.
That’s been a big upside driver for them and then readers might be familiar with Adobe Systems (ADBE) and their Creative Suite software. They’ve made that transition and it’s been very successful. The market has responded well to that consistency in revenue and earnings.
Steven Halpern: Let’s look at Salesforce.com (CRM), which you called an 800-pound gorilla in the Cloud computing space. What’s the attraction there?
Peter Staas: I think part of it—for Salesforce.com—is their scale. They are hands down the largest software service provider. It was founded back in 1999 by former executives from Oracle (ORCL) and they kind of play in the enterprise software market. They’re competing against Oracle, SAP, SaaS, and larger companies like that.
They generate most of their revenue from what they call their Sales Cloud which is a sales force automation platform, you know, the sales team can come up with customer and prospect information on the road, from their phone, wherever.
They have a lot of other software service offerings including Service Cloud, which is for customer service, a Marketing Cloud, and something that they call Salesforce1, which is basically a platform where other developers can develop software products that are then on the Cloud.
The big thing, I mean, with Salesforce.com and the transition to Software-as-a-Service, is the traditional enterprise market has been larger companies. This is very expensive sophisticated software, and with Salesforce doing the Software-as-a-Service model, it lowers the cost because it’s this monthly subscription fee.
Therefore, they were really able to bring some of these solutions to smaller and mid-size businesses. What attracts me about the company is that they really seem to be gaining more traction among some of the larger companies out there in the world.
Every quarter, of course, they’re always highlighting some of the new contracts that they signed with like ABB (ABB), which is an industrial company, Time Warner Cable (TWC), and so on and so forth. When you look at the actual numbers of like large deals, they’ve definitely been doing a lot more of them.
I think that the two other exciting developments for investors that I think suggest that this stock could have a lot more upside over time, one is that, and this was kind of lost in the shuffle during the call, during the conference call.
They signed a deal with an unnamed software company, which they described as basically one of the world’s top software companies. That software company is going to roll out its software product onto Salesforce’s Cloud. That’s a major development that could have pretty impressive implications if we see more of that.
The other thing too is they’ve rolled out kind of like a big data platform called Wave Analytics that applies to all of their other solutions that they have for enterprise resource management and that sort of thing. That is gaining a lot of traction and it’s been a very successful launch.
I think a big part of that—and they’ve kind of said that—this is something that is sort of a Trojan horse to get people, to get these larger organizations, to come over. To leave Oracle, or whoever, and come over to the Salesforce platform because it’s something that’s unique and it’s a huge selling point.
Given the amount of investment, and so on, and so forth, that it takes to change enterprise software, I think that this is going to be a slower…it’s going to take time but it seems like it’s picking up the pace so we definitely like Salesforce.com. Especially if the market, the stock market that is, experiences a correction later this year, which is something that we’re kind of on the lookout for.
Steven Halpern: Now, another recommendation of yours is Autodesk (ADSK). Could you briefly tell us about this stock?
Peter Staas: Autodesk is more of design for the real world I guess. You can develop a 3D model of a new product or part for some industrial product. It’s used like in architecture, engineering, design, manufacturing, those kind of things.
They’ve been gradually transitioning to more of a subscription-based model. They’ve got an option where you can rent the software for a limited period of time. They have a lot of different, like I say, subscription models that people can use.
They’re the first company in this space to move over to some Cloud-based offerings, and basically, they announced a date where they’re going to phase out sales of their traditional kind of on-premises software where you pay a huge upfront fee and then you have perpetual, you know, you have this software installed on your computer.
They announced a date where they’re going to move away from that, which should drive more people into their subscription-based models. And then, I think, the really encouraging thing too is that their products, their Cloud-based design solutions, which are really great because there’s a lot of different parties involved with designing and building a building, for example.
The Cloud-based solutions enable everybody to have access to the plans. It can really reduce the time from concept to real world execution, which has a real appeal to industrial and manufacturing companies.
And their Autodesk software—the service solutions have really—the sales of those has picked up and that’s made about 90% of the new accounts or new to the company, which indicates that they’re winning market share from their competitors.
We really like the transition that they’re making and we also love that they’re winning market share. I think that the slowdown in Europe and other markets is a bit of a concern and there are some currency headwinds but still a name that we like and we think definitely has some favorable tailwinds.
Steven Halpern: Now, we’re out of time but I’d like to briefly touch on your third recommendation, if you could, and that’s Tyler Technologies (TYL), a company that might be less familiar to our listeners. What do you like there?
Peter Staas: Definitely. Yes. It’s a mid-cap software name. They serve the public market so like municipalities and that kind of things. I think the really cool thing about Tyler Technologies—and what’s most interesting—is they dominate the software space for legal and judicial systems.
In fact, California was developing software for their court system. They were doing it in-house. It didn’t work out. All the counties had to go their own way and I think there were like 28, 27—something like that—counties that were up to purchase this software and all but two of them went with Tyler Technologies. That’s an impressive win rate.
One of their major competitors went out of business. We think that’s going to be a major tailwind with people shifting over to Tyler and then the other thing we really like about them is they offer this Software-as-a-Service for fee collection related to the court.
People can pay their fines or whatever online, and basically, Tyler will supply this software package for free to municipalities, court systems, and in exchange they get a cut of all the fees.
They get a service fee for all of these fines, and so forth that are collected and that can be a real, that’s a major upside driver for them as well. Another great name.
The stock is a little expensive right now. Probably one we’d want to buy on a pull back.
Steven Halpern: Again, our guest today is Peter Staas of Capitalist Times. Thank you so much for joining us.
Peter Staas: Thank you, Steve. I appreciate it.
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