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Cloud Computing : The next “hot growth” technology --- An update on Valuation

This week LinkedIn Corporation (LNKD), the first of the new wave of Social / Professional networking companies, went public in an IPO. The stock went from $45 and closed around $93 on the first day of trading.

I thought I would revisit an article I wrote last July where I looked at another ‘hot’ technology industry.

Cloud computing in simple terms according to Wikipedia is internet based computing. Software as a Service (SaaS) is software that is deployed and accessed over the internet. Saas is also called “software on demand”. Both these technologies are a rage nowadays. Companies that directly or indirectly operate in this space are considered the next Microsoft (MSFT) and Google (GOOG). Both Microsoft and Google are also creating products and services that will be delivered as a service and over the ‘cloud’ if you will. You may heard about Google Docs which is similar to Microsoft Office instead you access it via your browser from anywhere in the world. Let us take a look at four companies whose business model is related in some way to Cloud computing.

Two big and popular names that sport large cap market caps.

First up we have SalesForce.com. “salesforce.com, inc. provides customer and collaboration relationship management (CRM) services to businesses and industries worldwide.” Salesforce.com was founded in 1999.

Then, we have VMWare. “VMware, Inc. provides virtualization infrastructure software solutions and related support and services primarily in the United States.” VMware is a subsidiary of EMC corporation (EMC).

Two smaller and relatively less known names

“Taleo Corporation provides on-demand talent management software solutions”. It was incorporated in 1999.

“Concur Technologies, Inc. provides on-demand employee expense management solutions worldwide.” Concur was founded in 1993.

Now, let take a look at their valuations and other financial numbers.

In July 2010, the valuation and metrics were as below

Salesforce.com

(CRM)
VMware

(VMW)
Concur Tech (CNQR) Taleo

(TLEO)
Market Cap 11.98 billion 29.57 billion 2.24 billion 998 million
Sales 1.38 billion 2.19 billion 267.5 million 205.4 million
P/E 151 143 88.8 209
P/E (2012e) 61 46 46.8 26.7
PEG 3 2.62 2.47 1.46
P/FCF 45 32 40 28
EV/S 8.4 12.5 8.24 3.7
EV/EBITDA 70 77.6 33.9 27.74
5 year median ROE 5% 14% 6.6% -3.4%
5 year median Op Margin 3.7% 17.4% 9% -2.5%
5 year median sales growth 51.5% 69.4% 36.6% 28.5%
5 year median EPS growth 13.4% 67.6% 35.1% n/a
5 year median OCF growth 41% 42.6% 77.1% n/a


Now 5/20/2011, 10 months later….

Salesforce.com

(CRM)
VMware

(VMW)
Concur Tech (CNQR) Taleo

(TLEO)
Market Cap $20 billion $41 billion $2.6 billion $1.5 billion
Sales $1.8 billion $3 billion $317 million $254 million
P/E 312 102 309 N/A
PEG 3.7 2 2.6 2
P/FCF 281 34 52 52
EV/S 11 12 7 5.4
EV/EBITDA 139 56 44 48
3 year avg ROE 8% 12% 4% -2%
3 year avg Op Margin 7% 14% 14% -1.4%
3 year sales CAGR 29% 27% 23% 23%
3 year EPS CAGR 16% 17% (18%) n/a
3 year median OCF growth 22% 31% 26% 19%
Data sources: Capital IQ

SalesForce: Went from a market cap of $12 billion to $20 billion for a 66% rise. In that period, sales are up 28% and earnings have almost HALVED ($0.63 to $0.34 TTM). P/E went from 150 to 300. (One of the best examples in my opinion of why one should never short based on valuation)

VMware: Market cap went from $30 billion to $41 billion. A more modest 33% rise. Atleast here, the sales have kept up with market cap with a 36% rise. Profits have almost doubled and hence the P/E actually has come down from 143 to a mere 100.

Conqur: is almost flat by these standards up only 16%. Earnings have gone in the reverse direction while sales are up 26%. P/E went from 90 to 310.

Taleo; is up 50% ($1 billion to $1.5 billion). Earnings went from $0.04 to ($0.06). So, the P/E was 200 then and I don’t have a P/E to report now. Lets use P/FCF it went from 28x to 52x.

I was speechless looking at these valuations in July 2010. And I don’t have any more words now.

My Conclusion

Value investing will never go out of fashion. There will always be plenty of investors seeking out ‘growth’ by chasing the next hot stock / sector of the hour / day / week / month without paying attention to the valuation or the fundamentals. Investors who stay disciplined and invest in good businesses trading below their worth and with a margin of safety should continue to be rewarded.

Disclaimer: I have long positions in MSFT and AAPL. I do not have any positions in CRM, VMW, CNQR, TLEO.

About the author:

Adib Motiwala
Adib Motiwala is a Portfolio Manager at Motiwala Capital LLC, an investment management firm that manages separate accounts for its clients.

Visit Adib Motiwala's Website


Rating: 4.6/5 (13 votes)

Comments

Adib Motiwala
Adib Motiwala - 3 years ago
Actually my conclusion seems to indicate that these growth stocks have hurt investors while 'value' stocks have rewarded its shareholders. Based on last one year, the opposite has happened, except in Apple.

It is my intention to continue posting updates every 6-12 months to see how things pan out for these companies.
lynchfan
Lynchfan - 3 years ago
The data is saying that investors in these companies have done quite well. I'm not sure who has been hurt investing in these 4 stocks you mention.

But I do believe many newer tech companies are overvalued & represent bad investments going forward, while the more established ones -- think Microsoft , Cisco, Google are undervalued.

Also I'd point out that the 3 biggest players in cloud computing currently are Microsoft, Google, Amazon; and one, two, or all 3 of them will benefit greatly from it.
davethebooker
Davethebooker - 3 years ago
Patents , intellectual property, trademarks and sharing knowledge. The cloud is difficult to judge . It is the next generation of computing. We are still in the wild west so to speak . So valuations are nuts as Adib is pointing out.. And investment is speculation. Due to tech advances yet to be created that will cause premature obsolesance and cloud stock unstablility. He who owns the patents , and creates the tech that runs the hardware and software. That is the place to discover value. As the patents( and all intellectual property ) are the unseen moats of the cloud. And they are very very powerfull. But like value investment misunderstood. I think. Maybe.
davethebooker
Davethebooker - 3 years ago
Also those who advise those on the tech and how to use it for there own most effiecent uses. Per there compaines focus, purpose , and attraction to create greater value. Which may be unseen in certain arenas. Maybe.The advisors or compaines that do also have a protective unseen moat of understanding how to apply tech to each customers needs . This is a strong moat too. Possibly.

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