2 Richly Valued Tech Stocks With Actual Long-Term Value

Includes: CUDA, TYL
by: Nicholas Pardini


Most of the high P/E tech stocks in the current sector's bubble have little long-term growth viability.

Tyler Technologies and Barracuda Networks both fill niches with substantive macroeconomic catalysts.

For Tyler, this is automating government services.

For Barracuda, it's mid-size business cybersecurity.

With the enthusiasm revolving around the potential of social media and cloud computing creating a second tech bubble, many companies that make little-to-no money are trading at sky-high valuations. Recent price action in this sector is already setting up for the second tech bust within a fifteen-year period, which will wipe out investors in these sectors before they have a chance to take profits. However, in an environment of overvalued fluff companies, there are still viable businesses with substantive earnings and growth potential in the tech sector. Amazon, Microsoft, and Oracle crashed in the tech bubble, but went on to outperform the market for the next decade.

There are companies in this bubble that will do the same. Although these stocks have yet to sell off to a price worth buying, investors should keep Tyler Technologies (NYSE:TYL) and Barracuda Networks (NYSE:CUDA) on their watch lists as the long run winners from Tech Bubble 2.0. Both companies serve real needs in the marketplace, and have real fundamental growth prospects beyond free users and "likes".

Tyler Technologies' main line of business is using Software-as-a-Service applications to automate government services at the federal, state, and local level. Specific services they work on include record storage, processing of government documents such as permits, tax filings, court filings and licenses, creating e-payment systems, and administration of school, law enforcement, and property appraisals. Governments at all levels in the US desperately need to cut costs, and software automation is one the best and least politically painful ways to do it. It reduces overhead costs in terms of government workers (and their future pensions) and office space, without reducing government services. It also gives governments a better place to negotiate against public unions with cities such Costa Mesa, California taking measures to outsource government operations entirely and eliminate generous benefits public workers have over their private sectors equivalents. Since Tyler is the leading company in SaaS that has expertise in the public sector, it will benefit from this trend. Governments have been slow to adopt automation measures.

Tyler can grow at a high rate for at least the next 5-10 years. Currently, this is growth is more than priced in with a PEG ratio of 2.86 and a P/E of 64.4, but any point below $60 a share is a buying opportunity. We are looking to buy for the long term in the $50-55 range, or for a shorter-term trade when bullish technical momentum is restored.

Barracuda Networks stands out, as it is the leader for cybersecurity solutions for small-to-medium sized business. As more commerce moves online and geopolitical tensions increase globally, business will need to protect themselves from having their company files or customers credit card information from being hacked. Other leading cybersecurity firms focus on either individual identity theft (LifeLock) or on the large enterprise level corporate and governmental clients (Sourcefire, Fortinet, FireEye, etc.). Barracuda provides all of the basic needs of cybersecurity at a fraction of the cost of enterprise-driven competitors. Its services may not have the same bells and whistles, but it provides a cost-effective solution. Customers are clearly pleased with Barracuda's services, as the company has a 90% renewal rate amongst existing subscribers. New subscribers are increasing by a rate of 24%, and gross billings are growing by 20%.

Overhead costs are still growing at a faster rate than gross profits, so that is why we are waiting to buy. Even though earnings are negative, free cash flows from operations are positive, but not enough to justify the current stock price. Based on discounted free cash flows, the fair value for Barracuda Networks is $21-24 per share. Until it reaches this level or gross profits grow faster than SG&A costs, buying CUDA will have to wait.

Overall, with solid business models that suit real enterprise needs in the public and private sectors, Tyler Technologies and Barracuda Networks are long-term winners that have risen from the current tech bubble. Neither stock is currently trading at a favorable valuation, but as the euphoria from the momentum stocks continues to fade, these two companies stand out due to their sustainable business models and strong long-term demand for their core services.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.