Synchronoss (SNCR) After seeing some significant selling yesterday, a big bounce for this cloud service provider is in order. It is a Zacks Rank #1 (Strong Buy). It is the Bull of the Day.
Syncing up in the cloud
The cloud is nebulous place / thing / idea. What major carriers like Vodafone (VOD), AT&T (T) and Verizon (VZ) know is that the cloud is a space that they must play in if they plan on competing in the future with tech powerhouses like Microsoft (MSFT) and Google (GOOG). Currently, the cloud for consumers is dominated by Google and its Drive, but there are others like Dropbox, Box and the budding cloud services that Synchronoss services that are available from the wireless carriers.
On the most recent conference call the company noted that they will be focusing on the enterprise market. The mobile operator market is the focus after a partner in the space asked SNCR to develop an enterprise based cloud service. This was a big step for the company and a complete validation of what they have been working towards.
SNCR is a provider of on-demand transaction management software to Tier One communications service providers. The company's flagship ActivationNow and ConvergenceNow software platforms automate, synchronize and simplify electronic service creation and management of advanced wireline, wireless and IP services across existing networks.
Good Earnings History
Looking to the earnings history, I see a stock that has beaten the number in each of the last 6 reports. The most recent quarter was a beat of $0.03, which translated into a positive earnings surprise of 17%. That was an increase from the $0.02 beat reported for the December 2012 quarter, a 12.5% positive earnings surprise and the 11.7% positive earnings surprise posted in the September 2012 quarter.
Investors love to see when a company delivers stronger and stronger positive earnings surprises the way SNCR has done here. The quarterly increase in positive earnings surprise for SNCR is something that will draw attention from potential suitors as well.
Activation vs. Cloud Services
The most recent earnings report showed that the company saw solid growth from each of its two main service areas. The Cloud services sales accounted for $23.8M or 30% of total revenue. There was growth of 29% on a year over year basis.
We also learned on the most recent conference call that the company had 56M subscribers for the personal cloud services.
The Activation services segment brought in $55.7M or nearly 70% of total revenue. The segment grew by approximately 20% from the same period a year ago.
Earnings Estimates Tick Higher
Following the most recent earnings report, estimates for SNCR have increased. The Zacks Consensus Estimate for 2013 bumped from $0.91 to $0.97.
The same could be said of the 2014 Zacks Consensus Estimate as it rose from $1.17 to $1.24.
The valuation picture for SNCR is one that may take some buffering to understand. Buffering is a term that people will recognize when they are download media, it means the delay between what is already loaded and what can be played. So think of the valuation of one that might appear to be ahead of itself, but it could just be a matter of perspective. 35x trailing earnings is higher than the industry average of 21x and 33x forward earnings also shows the company trading at a premium to the industry average of 19x. The more conservative measure of price to book shows the company trading at 3.3x vs the 4.5x industry average, so a little discount there. What should keep you interested in this stock is the expected top line growth for SNCR. The current estimates are calling for 25% top line growth vs 11% for the industry average and 20% in 2014 vs the 8.6% industry average. So the company is going to be growing much faster than its peers over the next year and a half and that has caused the valuation to appear inflated right now.
The price and consensus chart shows a pretty great long term story with annual earnings estimates moving higher each year since 2011. More recently, the earnings estimate lines that correspond to 2013 and 2014 have trended higher. That tells me the along with the yearly growth in earnings, there was a recent event that made the future look even brighter. Further, as I researched this idea, I kept on coming up with the conclusion that AT&T or Verizon will be looking to buy this company ... or maybe even both. I like this idea on both the short term and long term.
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