The Microcap Speculator submits: One stock at the top of my watch list is Tumbleweed Communications (TMWD). Tumbleweed provides enterprise software that secures email and other communications. I first looked at Tumbleweed several years ago after a nice run shorting its competitor Zixit (ZIXI). I never took a position, but now TMWD is getting interesting on the long side.
Tumbleweed has now put together two cash flow positive quarters in a row, and after four years of reporting GAAP losses, seems to be on a trajectory towards GAAP profitability. TMWD just upgraded its corporate suite, bringing in Craig Brennan as president and CEO. Brennan previously was CEO of Brio, Inc., a business intelligence software company that was acquired by Hyperion. It provides security software to many top banks, healthcare institutions and, as of last month, the U.S. Marine Corps. In a recent interview, Brennan explained Tumbleweed's position within the industry:
When I look at the landscape, there are 50+ competitors in this space, 30 of whom are under $25M. This tells me that the industry is still fairly immature and fragmented. The space is growing rapidly, and I expect we’ll see the same consolidation we’ve seen in ERP, CRM and BI: fewer players with more comprehensive, complete solutions. The focus will inevitably move from point products to solution suites, and right now there are no clear dominant leaders. Tumbleweed has an advantage right there -- the company’s products were developed to interoperate and provide complete functionality for our customers. We’ve had a complete, single-vendor approach for some time, have been battle-tested in some of the most demanding companies in the world, and we’re well-positioned to lead the market as consolidation occurs.
TMWD trades at an enterprise value to revenue ratio of 3.55. That is a lot more than I usually like to see in a stock, but my research shows that is not atypical for software stocks. Zixit trades at 5.72x sales, Symantec at 8.35x sales, Microsoft at 6.05x sales, and Oracle at 5.64x sales. I don't mean to suggest that TMWD is in the same league as the latter three; just that its valuation is by no means rich for a software stock.
Two concerns. First, there is a bit of insider selling, but nothing too extreme. Second, the stock is somewhat extended technically and is nearing resistance from the last runup in late October 2004.
DISCLOSURE: No position. Not a recommendation to buy or sell any security -- for educational/informational use only.