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3 Cloud-Based Stocks Still Worth Buying
07/20/2012 8:30 am EST
One sector of tech that has gotten a bit ahead of itself is the cloud-based computing rage that has sent investors and tech companies scrambling to grab small players for the next big thing. But if you're particular, there are still some great firms at good prices says Peter Staas of Personal Finance.
Although the media hysteria surrounding the initial public offering of Facebook (FB) reflects the promise and ubiquity of the social web, investors shouldn’t overlook evolutionary trends in the enterprise software space, where established heavyweights are betting big on software as a service (SaaS).
The appeal of SaaS solutions to business customers is simple: Operational efficiency and lower costs, a compelling proposition at a time of anemic economic growth.
These lower upfront costs have driven penetration of SaaS solutions among small and midsize businesses, many of which lack the financial wherewithal and IT expertise to implement full-fledged enterprise software packages. We expect demand for Internet-delivered business software to continue to grow, as these investments translate into improved efficiency.
Over the past nine months, IT heavyweights such as SAP (SAP) and Oracle (ORCL) have moved aggressively to beef up their cloud-based product offerings and boost their exposure to recurring revenue streams.
This wave of consolidation reflects growing demand among large enterprises for web-accessible applications that fulfill previously unmet needs or provide superior solutions. A recent study conducted by Forrester Research (FORR) estimates that 68% of larger companies have started adopting SaaS solutions.
With investors expecting additional acquisitions in the space, shares of small-cap SaaS providers have remained remarkably resilient in recent weeks, despite the weakness in the broader market.
For example, Concur Technologies (CNQR) has returned 14.7% since we profiled the stock on Feb. 22, while shares of LivePerson (LPSN) have surged by 25.7%. Both stocks hit new 52-week highs in mid-June.
Flying Through the Cloud
Concur Technologies 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.|pagebreak|
The firm has grown and preserved 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 (CRM), to double its distribution network by 2013.
In its fiscal second quarter ended March 31, the company posted revenue of $108.4 million, up 28% year over year and 8% sequentially. Management cited a robust uptick in bookings and strong demand, prompting it to raise its guidance for full-year sales growth to 26%. Investors should expect further upside.
Management indicated that the company’s services usually deliver enough cost savings to pay for themselves within the first six to 12 months, a metric that hasn’t gone unnoticed. Earlier this month, the US General Services Administration (GSA) had awarded the firm a sole-source contract that enables Concur Technologies to seek business from the roughly 90 civilian agencies under the GSA’s purview.
Even better, a renewal rate that exceeds 90% is testament to the firm’s execution, and should ensure that much of these new sales will become recurring revenue. A potential takeover candidate that also boasts strong growth prospects, Concur Technologies rates a buy under $68, and is a bargain if the stock dips to less than $55. Prospective investors should ease into this position to take advantage of any potential weakness in the broader market.
Marketing in the Cloud
LivePerson specializes in “intelligent engagement” and stands to profit from the growing recognition that providing solid customer service on the web requires nuance and personalization.
The company has developed a cloud-based platform that enables companies to connect with their customers in real time via chat, voice, and video. 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, whether it’s a Web site, social media, or a mobile device.
The firm has also developed services that identify both positive and negative content on Twitter and other social media sites, providing clients with an opportunity to interact with their customer base in ways that promote loyalty and improve satisfaction.
Although we like LivePerson’s growth story and regard the company as a potential takeover candidate, the firm is in the early chapters of its growth story,and the stock is subject to volatility. LivePerson is a buy, but only on dips to less than $15.
Stopping Threats to the Cloud
Although the prevalence of broadband connections and other infrastructure improvements have made SaaS a reality, the migration of data-intensive functions to the crowd continues to drive demand for network security solutions. We expect consolidation in this space to pick up in coming years, with IBM (IBM) recently establishing a separate security division and EMC (EMC) and Cisco Systems (CSCO) seeking to bulk up their exposure to this market.
These secular tailwinds and a scarcity of publicly traded companies with pure-play exposure to this business line prompted investors to bid shares to unsustainable prices during the recent rally. Fortunately, concerns about the EU sovereign-debt crisis and the health of the global economy have led to a sell-off, giving savvy investors an opportunity to pick up our favorite stock at slightly more reasonable valuations.
Fortinet (FTNT) provides network security solutions and specializes in unified threat management, or network security appliances that combine multiple layers of protection. Not only does the company benefit from big data, the migration to the cloud, and the profusion of Internet-enabled devices, but the firm also continues to win market share from competitors.
Whereas new bookings slowed at rival Check Point Software Technologies (CHKP) in the first quarter, Fortinet grew its billings by 28% from year-ago levels. With a cash balance of roughly $4 per share and an ample stream of recurring revenue, Fortinet rates a buy under $23.
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