2 Stocks Firmly Planted in the Clouds

03/01/2012 8:00 am EST


Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

If you're just wrapping your mind around the first examples of cloud computing, you better hurry up, because round No. 2 has just begun, writes Peter Staas of Personal Finance.

With all the hype surrounding Facebook’s IPO and speculation that Twitter could go public in 2012, the recent surge in mergers and acquisitions activity in the software-as-a-service space (SaaS) hasn’t garnered as much attention.

However, overlooking this emerging growth trend would be an “epic fail.” Information technology (IT) giants such as Oracle (ORCL), Salesforce.com (CRM), SAP (SAP), and IBM (IBM) are flush with cash and willing to acquire Internet-delivered business services.

The deals have come fast and furious in recent months, as companies seek to beef up their cloud computing offerings and add exposure to recurring revenue streams.

Oracle in October 2011 announced the $1.5 billion acquisition of RightNow Technologies, which provides customer service online, and followed up this transaction by striking a deal to buy human-resources (HR) software maker Taleo Corp (TLEO) for $1.9 billion. Meanwhile, Germany-based SAP in December 2011 announced a $3.4 billion deal to purchase SuccessFactors (SFSF), a company that specialized in cloud-based HR solutions.

Although sales of traditional software packages still dominate the market, research firm IDC estimates that 24% of all new purchases of business software will follow the SaaS model.

The appeal of SaaS solutions to corporate clients is simple: Operational efficiency and lower costs, a compelling proposition at a time of anemic economic growth.

Businesses traditionally run a combination of prepackaged software such as Microsoft’s Office suite—which entails a hefty, upfront licensing fee—and proprietary applications that are developed and updated by an in-house IT department. This antiquated model requires companies to purchase systems and data-storage equipment to support business functions. Hiring an extensive IT staff to maintain these systems adds to the cost.

Cloud operators host software applications at a central location and provide access to enterprise users via the Internet for a subscription fee. This approach limits customers’ need to invest in data storage and server infrastructure and yields a highly scalable solution that doesn’t require massive capital spending to support new users or applications.

Central hosting also ensures that all users within the organization can access the most up-to-date version of the software, relieving IT departments from the time-consuming process of updating the programs on each individual computer.

Concur Technologies (CNQR)
This company provides cloud-based software that tracks, manages, and pays employees’ travel- and business-related expenses, a manual function at many companies.

In early 2011, the company purchased TripIt for $120 million, broadening the scope of its service offerings from expense tracking and reimbursement to trip planning and booking. This acquisition brings Concur Technologies one step closer to delivering a seamless travel experience, with TripIt automatically rebooking any canceled or delayed flights and checking in the business traveler to his or her hotel of choice. Rental cars and taxi rides can also be automatically paid for and reimbursed through Concur Technologies’ comprehensive platform.

An early mover in this space, the firm has preserved and grown its market share by partnering with potential rivals such as American Express (AXP), Automatic Data Processing (ADP), and Bank of America (BAC).

Concur Technologies has invested heavily in building out its own sales staff, and management expects these efforts, coupled with a new partnership with Salesforce.com, to double its distribution network by 2013. In 2012, the firm will work with American Express to introduce its travel platform to the Japanese market.

Management expects the company to grow its revenue by 25% in 2012, and the firm recently booked its first $100 million order. A potential takeover candidate that also boasts strong growth prospects, Concur Technologies rates a buy under $58. Investors may want to wait for the stock market to pull back before establishing a position in the company.

LivePerson (LPSN)
This firm has developed a cloud-based platform that enables companies to connect with their customers in real time via chat, voice, and content delivery.

In addition to these customer-service capabilities, the firm’s analytics ensure that these interactions occur at the right time and through the appropriate channel. For example, a customer looking at a list of frequently asked questions on a company’s Web site might receive a prompt to chat with a live representative. Retailers use LivePerson’s software to deliver a coupon to customers who have spent a certain amount of time browsing the firm’s Web site.

Roughly 8,500 companies have deployed LivePerson’s popular live chat and voice solutions on their Web sites. The firm also recently launched LP Insight, an analytics product that mines chat transcripts to identify potential site changes that would improve conversion rates. For example, a large retailer discovered that including the dimensions in one of its online product descriptions led to a substantial sales increase.

During the third quarter of 2011, the company added 22 new enterprise customers and grew revenue by 22% year over year and 8% sequentially. Although we like LivePerson’s growth story and regard the company as a potential takeover candidate, investors should note that the firm is in the early chapters of its growth story and that the stock is subject to volatility. LivePerson rates a buy up to $14 for aggressive investors.

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