As the stock market continues to head higher, investors may want to consider small-cap stocks that have the ability to generate outsized returns over the coming months and years. One small-cap company that has really caught my attention over the past few months is InterCloud Systems (ICLD). The company has made several important announcements and the marketplace has rewarded InterCloud Systems for its foresight.
As a cloud integrator, InterCloud Systems is a global single-source provider of value-added IT and telecom solutions for both corporate enterprises and service providers. InterCloud offers cloud and managed services from its proprietary cloud platform and professional consulting services to assist its customers in meeting their changing technology demands. Its engineering, design, installation and maintenance services support the build-out and operation of some of the most advanced enterprise, fiber optic, Ethernet and wireless networks in the world. The company is operating in one of the hottest areas of the market which is poised for significant growth in the coming years. The shares have already begun to participate in a rally that was long overdue.
Shares of InterCloud Systems have appreciated by nearly 350% since the beginning of November as shown below:
That performance made InterCloud Systems one of the hottest and best performing stocks of 2013. But now it's time to look to the future to see if shares will continue their rapid ascent. I believe they will.
When analyzing a small-cap technology company, investors should pay attention to 3 things:
- Earnings Growth
InterCloud Systems appears to be firing on all 3 cylinders. The company reported third quarter earnings on November 14th, 2013. The earnings were so spectacular that the share price soared by more than 250% during the following trading session. The company reported total revenue of $16.2 million compared to just $3.0 million for the third quarter of 2012. That performance represented a 448% year-over-year increase. The growth occurred because of organic growth and strategic acquisitions. The company also had a stellar performance because of its gross profit and net income numbers. Gross profit for the third quarter 2013 came in at $5.5 million, compared to just $1.2 million for the comparable period a year ago. Additionally, and perhaps most importantly, the company went from a net loss to a net income. The company generated net income of $1.3 million, compared to a loss of $800,000 for the same period a year ago.
The company appears to be doing what is necessary for increasing revenue growth while minimizing cost. This has led to a positive net income which all investors will be sure to take notice of. Because of the company's market capitalization and funding needs, it's also extremely important to take a look at the company's balance sheet, particularly the company's cash balance.
As of September 30, 2013, InterCloud Systems had approximately $3.4 million in available cash. That represents a $1.1 million increase in cash from the prior quarter. Additionally, the company had approximately $11.7 million in long-term debt. It's important to note that the company made an importance announcement regarding its balance sheet on January 8, 2014. InterCloud announced that it had reduced its liabilities by approximately $7.2 million as of the end of 2013. The reduction in liabilities included the following:
- Retiring Preferred Stock
- Paying down the $1.8 million promissory note because of the AW Solutions Subsidiary sale
- Repayment of $1.8 million of principal
Because of the growing revenue and rising share price, it appears that InterCloud Systems will continue to be able to reduce liabilities which will in turn help the company to continue minimizing its costs.
In addition to the phenomenal earnings growth shown thus far, InterCloud Systems is also an ideal investment because of its strategy. In particular, its ability to acquire strong companies at bargain prices in an effort to continue growing its revenue stream and broaden its distribution capabilities for its cloud platform of services. One recent acquisition that investors should be paying special attention is the deal involving Integration Partners - NY Corporation. The completion of the acquisition was announced on January 2, 2014.
Integration Partners - NY is a managed service provider offering its enterprise and service provider clients an end-to-end portfolio of IT solutions including voice, data, optical and unified communications services. The company consults, designs, builds, implements, and services IT networks for enterprise and service provider networks. The synergies with InterCloud Systems will allow its clients to transition from existing IT networks to open architecture cloud based solutions running on InterCloud's proprietary cloud platform.
Speaking of IPC's client list, it is extremely impressive. A few examples of the impressive client list include several hospitals such as Lutheran Medical Center, the OTC Markets, the New York Times, and TEVA Pharmaceuticals.
Additionally, the IPC acquisition will help InterCloud Systems pursue its "Go to Market" strategy. The "Go to Market" strategy encompasses both a direct and indirect component. The direct component includes reaching end customers through direct sales to enterprise and service providers and cross selling and upselling synergies. The indirect component involves reaching channel partners such as national wholesalers, application developers, value added resellers, and tier 2 and 3 service providers.
In addition to all of the above referenced benefits of the IPC acquisition, investors should not forget that ultimately, revenue growth is king. From 2010-2012, IPC generated an average annual growth rate of 74.5%. This rising revenue growth pattern is expected to continue because the company already has a highly experienced sales force in place. Revenues may even grow beyond the historical growth rate because InterCloud should be able to generate additional sales because of synergies and cross selling opportunities.
In addition to a growing revenue stream and a successful growth strategy, InterCloud Systems also has the added benefit of being in an incredibly hot niche within the technology sector called cloud.
Earlier this year, Gartner released a report identifying Cloud services as a highly in demand area of technology. Gartner predicted that the integration of cloud-based platforms would accelerate through 2016. There were several key components of the analysis that investors should be aware. First, Gartner predicts that global spending on public cloud services will grow at a compounded annual growth rate of 17.7% from 2011 through 2016. The market size will grow from $76.9 billion to $210 billion. Additionally, Gartner estimates that 59% of all new spending on cloud computing services comes from North American businesses and organizations. That number is expected to accelerate over the coming years. Given that a good chunk of InterCloud's customers are from North America, investors can expect to see that growth trend really payoff.
Investors might be asking, "Cloud growth is expected to increase but why will InterCloud benefit from that?" The answer is simple. InterCloud's design has several significant advantages including the following:
- Service Level Agreement based private and public cloud services. Customers can expect 99.99% availability.
- InterCloud Systems is co-located in two of the biggest carrier hotels in the United States in New York City and San Francisco.
- The company is currently in 4 data centers which include 2 carrier hotels and 2 campus style data centers.
- The company's cloud infrastructure is built on Tier 1 vendors such as HP, Brocade, and Intel.
- InterCloud also has a highly customizable and scalable architecture to meet customer's unique requirements. The company also offers a full suite of professional services to essentially make it a 1 stop shop for all relevant cloud servicing requirements.
It's clear that InterCloud Systems appears to be on the right path. But traders and investors should be aware of the risks. Given the rising revenue, net income growth, and adequate cash balance, dilution doesn't appear to be a major concern. The concern I would have would be deciding an on appropriate entry point for an investment. Given the rapid rise in valuation, investors may be worried about an ill-timed investment. To combat that worry, investors may want to consider scaling into a position. Essentially this means that if an investor was initially planning to invest $10,000, they want to start off with a much smaller investment such as $2,500. Then if the stock price drops after, the investor can average down and improve their average purchase price. Conversely, if the stock happens to rise, the investor can either continue adding or just sit back and enjoy the gains on their original purchase price.
InterCloud Systems appears to be an extremely promising small-cap technology company. Given that the stock market is at an all-time high, investors need to think outside the box to identify companies that will outperform. InterCloud Systems appears to be such an opportunity. Because of its growing revenues, its unique strategy, and a hot technology niche, investors may want to consider an investment in this company.