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
| VMware |
|Concur Tech (CNQR)|| Taleo |
|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|
|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….
| VMware |
|Concur Tech (CNQR)|| Taleo |
|Market Cap||$20 billion||$41 billion||$2.6 billion||$1.5 billion|
|Sales||$1.8 billion||$3 billion||$317 million||$254 million|
|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%|
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.
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.